Trader Joe's Recipe for Success

By limiting its stock to specialty products at low prices, Trader Joe's sells twice as much per square foot than other supermarkets

It began with plain, "Greek style" yogurt, which has a somewhat sharper taste than the traditional American kind. Then came the nonfat version and one mixed with honey. Soon, a cornucopia of new flavors appeared. Strawberry, fig, and the truly yummy apricot/mango blend. The cost: $1.29 for an 8 oz. container that's a little larger than a typical yogurt serving. That's how it is at Trader Joe's, where a trip to the supermarket is sort of a culinary adventure, a chance to discover something new, like apricot/mango Greek-style yogurt.

There are lots of ways to demonstrate customer service. Trader Joe's excels at one of the basics: delivering unique products at reasonable prices. The chain, which has 280 stores in 23 states, has from its earliest days tried to bring unusual goods to a clientele ranging from gourmands to starving artists. The strategy helped Trader Joe's rack up an impressive $6.5 billion in sales last year, according to the trade publication Supermarket News. "I do as much shopping as possible at Trader Joe's because of the prices," says Elizabeth Payne, an actress in Los Angeles.

Finding a Niche

Sandy Skrovan, who heads food store research at the consulting firm TNS Retail Forward, figures Trader Joe's generates sales in the neighborhood of $1,300 per square foot, double the supermarket industry average. Skrovan knows exactly how. She regularly shops for what she says is the widest variety of gluten-free foods at two company locations near her home in Columbus, Ohio. "When you think Trader Joe's you think of innovative products," she says. "That's what drives their model—return patronage and quality products at a fair price."

The strategy was born of desperation. In 1967 Joseph Coulombe owned a small chain of convenience stores in the Los Angeles area that were struggling to compete against a fast-growing newcomer named 7-Eleven. That's when the Stanford University business school grad read a surprising fact—that alcohol consumption rose along with education levels. Coulombe stocked his stores with what he says was the largest assortment of California wines at the time—17 brands. Then he watched them fly off the shelves, as a new demographic now known as yuppies discovered his stores.

As the 1970s came, Coulombe was among the first to turn Southern California shoppers on to treats such as brie, wild rice, Dijon mustard, and Vermont maple syrup. Coulombe modeled his approach on that of Stew Leonard's, a Connecticut food merchant famous for carrying a limited assortment of quality products, and to that of Brooks Brothers, which sells only its own label suits. "We adopted a policy of not carrying anything we could not be outstanding in, in terms of price," Coulombe told BusinessWeek in a telephone interview. "It took us about five years because we had to create a whole new chain of logistics. We especially encouraged small businesses as vendors."

Private-Label Products

Today Trader Joe's carries about 2,000 products, vs. 30,000 at a typical supermarket. About 80% of Trader Joe's goods are private label, compared with 16% for the rest of the supermarket industry. The chain doesn't carry familiar mass-market brands such as Coca-Cola, Budweiser, or Pampers. You'll find just one kind of laundry detergent, the "low-sudsing," biodegradable house brand. But there are 10 different kinds of hummus, starting at just $1.99.

Testing for many new products is done at company headquarters in the Los Angeles suburb of Monrovia, Calif. Staffers in the test kitchen ring a bell when new products are available so an employee tasting panel can sample.

Beyond that, though, the company is loath to talk about itself or its private-label suppliers. That hush-hush strategy is a two-way street. "Their suppliers simply don't talk to anyone about the company," says W. Frank Dell, a food industry consultant in Stamford, Conn. "They love the company. They are great to work with and pay their bills on time. They don't tell the outside world they have Trader Joe's as a customer."

Other supermarket chains such as Kroger (KR) and Safeway (SWY) have caught on to the private-label strategy, offering more prepared and organic foods. But Trader Joe's still manages to keep things fresh, introducing limited runs of Candy Cane Joe-Joe's cookies at Christmas that look like Oreos but taste like Girl Scouts' Thin Mints. "They're like a shark, they have to keep moving," says Len Lewis, who wrote a book, The Trader Joe's Adventure, about the company. "But they are very good at it, and now they have companies coming to them with new products."

Shopping at Trader Joe's isn't always a bowl of cherries. Parking at their urban locations is usually a challenge. Since the stores tend to be on the small side—less than 15,000 square feet vs. 50,000 or more for conventional supermarkets—the lines can get long and the space cramped, especially on weekend afternoons.

Satisfied Workers

That's where another distinctive feature of Trader Joe's comes into play, its cheerful employees. Coulombe says he tried from the start to make Trader Joe's a place where people would enjoy coming to shop. Inspired by a trip to the Caribbean, the book Trader Horn, and the dawning of the jet age, he sought to make a shopping excursion resemble a vacation. Employees wear Hawaiian shirts, hand out food and drink samples from little tasting huts, and employ nautical terminology. Store managers are called captains, for example; assistant managers are known as first mates. The stores themselves look rustic, covered with cedar plank walls, for example, and hand-painted signs.

Ask a Trader Joe's employee about a product and he will practically sprint down the aisle, grab a bag of whatever you had questions about and join you in a taste test. And returns? No questions asked, even if the goods have been opened and you simply didn't like the product. "The people who work there are just wonderful," says Ruth Leibowitz, a dance instructor from Ridgefield, Conn., who watched a Trader Joe's clerk dart to find her a bottle of the house brand (Trader Zen) ibuprofen during a recent trip.

Coulombe also wanted to make sure his employees were paid fairly, instituting a policy in the 1960s that full-time employees had to make at least the median household income for their communities—an average of $7,000 a year at the time, $48,000 today. Store captains, almost all of whom are promoted from within, can make six figures annually. Trader Joe's also allows part-timers to earn health-care benefits, a feature that makes the store a haven for artists, musicians, and other creative types who wouldn't normally seek supermarket jobs.

A Successful Formula

Now 77 and retired, Coulombe sold Trader Joe's in 1979 to privately held German supermarket giant Aldi. The German owners have let the chain run more or less autonomously, keeping many of the original strategies in place.

Unlike most supermarkets, for example, Trader Joe's doesn't accept coupons, collect customer shopping info from loyalty cards, or feature weekly sales. Instead it adopts an everyday, low-price strategy. The company does run folksy radio ads in local markets. In a current ad, Trader Joe's Chief Executive Officer Dan Bane pokes fun at other supermarkets that have installed flat-screen TVs for customers to watch at checkout counters. At Trader Joe's, he says, customers can entertain themselves by "actually talking" to employees.

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