1) Is the supermarket industry profitable?
•Discuss key trends that are influencing traditional supermarkets.•Conduct the 5 forces analysis to assess the profitability of the industry.
2) What are the key sources of Trader Joe’s competitive advantages?
•Identify the key sources of Trader Joe’s competitive advantage?• What activities and choices in a value chain diagram enable the firm to create more value than most rivals? Conduct a value chain analysis to support your argument.
3) What are the main threats to Trader Joe’s competitive advantage? Is their advantage sustainable?
•Evaluate Trader Joe’s position using the RBV framework (valuable, rare, inimitable, sustainable?); also, evaluate their ability to retain customer
Trader Joe’s 9-714-419 R E V : A P R I L 8 , 2 0 1 4 ________________________________________________________________________________________________________________ HBS Senior Fellow David L. Ager and Michael A. Roberto, Trustee Professor of Management at Bryant University, prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School, and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2013, 2014 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. D A V I D L . A G E R M I C H A E L A . R O B E R T O Trader Joe’s In July 2013, Market Force Information released the results of a new study in which over 6,000 Americans ranked their favorite supermarkets in a variety of categories. Trader Joe’s ranked No. 1 overall.1 Consumer Reports ranked Trader Joe’s the second-best supermarket in the country in 2012.2 One year earlier, Fast Company named Trader Joe’s the 11th most innovative firm in the U.S.3 Hundreds of people waited in line for the doors to open on March 22, 2013 at the grand opening of Trader Joe’s in Columbia, South Carolina. Local police directed traffic, and people hunted for parking at nearby businesses because they couldn’t find a spot in Trader Joe’s parking lot.4 Customers arrived at 3:00 a.m. on June 29, 2012, to line up for the opening of a new Trader Joe’s in Lexington, Kentucky.5 That same scene played out at new store openings around the country. Job seekers flooded the firm with applications when they learned of a new store. Meanwhile, retail experts marveled that the quirky grocer generated much higher sales per square foot than any of its rivals. With all that success, Trader Joe’s had attracted imitators. Tesco, the world’s third-largest retailer, had launched a chain of small neighborhood markets in the western United States. The British firm appeared to borrow extensively from the Trader Joe’s concept with its Fresh & Easy stores. In April 2013, Tesco announced that it was withdrawing from the U.S. market, hoping to find a buyer for its approximately 200 stores. The British retailer recorded a $1.8 billion loss associated with its failure in the U.S. market.6 Tesco’s troubles did not discourage other retailers from introducing smaller-footprint stores. Wal- Mart, the world’s largest retailer, had experimented with its Neighborhood Markets concept since 1998. These smaller grocery stores differed from traditional Wal-Mart supercenters in size and product variety. They were roughly 38,000 square feet in size and only offered grocery and pharmacy items. The Neighborhood Markets concept had evolved over the years and recently began to show promising results. In 2011 the firm launched Wal-Mart Express, a 12,000–15,000-square-foot store that the company described as a “bit of a hybrid between a food, pharmacy and convenience store.” The first 10 stores turned profitable in one year.7 In May 2013, Wal-Mart announced strong comparable store sales growth at these smaller locations, and the firm indicated that 40% of new store openings over the next year would come in the small-format category. In 2013, it planned to open over 100 small-format stores. The head of Wal- Mart’s U.S. business, Bill Simon, declared at an industry conference, “You’ll see us increasingly moving into smaller formats. They compete really well against multiple channels.”8 Many other For the exclusive use of T. Phan, 2020. This document is authorized for use only by Trang Phan in MGMT 449_THUR_Spring 2020 taught by JUNG YEON LEE, Kennesaw State University from Jan 2020 to Jul 2020. 714-419 Trader Joe’s 2 retailers, including Target, Kroger, Giant, Tops, and Publix, had launched smaller-format experiments as well. Meanwhile, Amazon continued to make a push into the grocery business. In June 2013, Amazon expanded its online grocery service outside of Seattle for the first time, with an entry into the Los Angeles market. Experts predicted that Amazon would introduce the service in San Francisco later in the year and as many as 20 additional cities in 2014.9 As the onslaught of new competition emerged, Trader Joe’s had to consider how it might adapt to cope with these threats. Company History Joe Coulombe grew up in San Diego, California during the Great Depression. After completing his MBA at Stanford in 1954, Coulombe took a job with Rexall, a North American drugstore chain. While working there, he launched a convenience store chain called Pronto Markets in 1958. Coulombe eventually acquired the small chain from Rexall and branched out on his own. He secured financing from Adohr Milk Farms. However, 7-Eleven acquired Adohr Milk Farms in 1965. The dominant player in the convenience store industry now owned Coulombe’s source of capital, which he found untenable. Coulombe shifted his strategy and founded Trader Joe’s in 1967. He explained the origins of the concept: Scientific American had a story that of all people qualified to go to college, 60% were going. I felt this newly educated—not smarter but better-educated—class of people would want something different, and that was the genesis of Trader Joe’s. All Trader Joe’s were located near centers of learning. Pasadena, where I opened the first one, was because Pasadena is the epitome of a well-educated town. I reframed this: Trader Joe’s is for overeducated and underpaid people, for all the classical musicians, museum curators, journalists—that’s why we’ve always had good press, frankly!10 Trader Joe’s offered products aimed at the sophisticated consumer interested in finding good bargains. The store tried to offer products (such as whole-bean coffees, sprouted wheat bread, and black rice) not typically found at supermarkets. The environmental movement had caught Coulombe’s eye during those early years, which prompted him to sell many natural and organic foods. Soon the company began offering private label items. The first private label product, granola, launched in 1972.11 In the ensuing years, Trader Joe’s offered an extensive line of private label items with brand names such as Trader Joe’s, Trader Ming’s, Trader Jose, Trader Giotto, and the like. Interestingly, Coulombe also experimented with a variety of nonfood items, ranging from music albums to pantyhose. In addition, trying to cater to the educated, sophisticated customer, Coulombe chose to offer a wide selection of California wines. The wine became a focal point in the ensuing years, while the albums and pantyhose disappeared from the store’s shelves. The stores tended to be quite small, less than 10,000 square feet in many cases. Trader Joe’s stocked far fewer items than a typical supermarket. All of its stores adopted a South Seas theme: Coulombe remembered, “I read that the 747 [Boeing jumbo jet] would radically reduce the cost of travel, and I came up with the term ‘Trader’ to evoke the South Seas. The first stores were loaded with marine artifacts.”12 Coulombe also outfitted the employees with Hawaiian shirts. The store manager became known as the “Captain” of that location, with a “First Mate” serving as his or her assistant. Coulombe believed strongly in paying employees a good wage. He decided that his average full- time employee should earn the median family income for the state of California—$7,000 per year at the time the company was founded. He said, “What I keep telling people [is] forget about the For the exclusive use of T. Phan, 2020. This document is authorized for use only by Trang Phan in MGMT 449_THUR_Spring 2020 taught by JUNG YEON LEE, Kennesaw State University from Jan 2020 to Jul 2020. Trader Joe’s 714-419 3 merchandise; it’s the quality of the people in the stores.”13 He took great pride in the fact that many employees loved working there and stayed for years. The company eschewed traditional supermarket advertising, such as coupon-filled circulars in the Sunday newspaper or television commercials. Instead, it distributed a customer newsletter, which came to be known as the “Fearless Flyer.” The newsletter provided information on certain products and introduced new items. It did not offer sales and promotions, however. Instead, the company embraced an “everyday low-pricing” philosophy. Coulombe also recorded many short radio ads in which he would tell behind-the-scenes stories about various products. Early commercials were broadcast on KFAC, a classical music station based in Los Angeles.14 The Aldi acquisition Coulombe pursued a very deliberate growth strategy: during his 20- year tenure as CEO, he typically opened roughly one store per year. He did so without ever straying from the Southern California region. In 1979, German grocer Theo Albrecht, who owned one of Germany’s most successful grocery chains—Aldi North—became enamored with the Trader Joe’s concept, and acquired the company. Coulombe agreed to remain as CEO, a position he held until 1988. Albrecht ran a lean low-cost operation with minimal overhead. His discount grocery stores bore a strong resemblance to the Trader Joe’s business model, minus the South Seas theme and a concerted focus on cultured, urbane consumers. Aldi North sold mostly private label goods at low prices, stocked far fewer items than a typical supermarket, and maintained a fairly small footprint. It also carried a small amount of fresh fruits and vegetables. Theo’s brother, Karl, owned a sister chain, Aldi Sud, which would eventually open small-footprint discount grocery stores in the United States. As of July 2013, Aldi Sud operated over 1,000 stores across 31 states.15 Together, the two Aldi chains operated roughly 10,000 stores around the globe.16 Many experts attributed Wal-Mart’s exit from the German market in 2006 to its failure to match Aldi’s combination of merchandising prowess