Company Case Trader Joe’s:Cheap Gourmet—Putting a Special Twist on the Price-ValueEquation

Apple Store openings aren’tthe only place where long lines form these days. Early on a summermorning, there’s a crowd gathered, eagerly awaiting the opening ofa Trader Joe’s out- post. The waiting shoppers discuss all thingsTrader Joe’s, in- cluding their favorite items. One customersuggests the chain will be good for the neighborhood even thoughthere are already plenty of grocery stores around, includingvarious upscale food boutiques.

This is a scene that plays outevery time the Southern California–based Trader Joe’s opens a newstore—something that only happens a handful of times each year.Within mo- ments of a new opening, a deluge of customers makes ital- most impossible to navigate the aisles. They line up 10 deep atcheckouts with carts full of Trader Joe’s exclusive $2.99 CharlesShaw wine—aka “Two-Buck Chuck”—and an assortment of other exclusivegourmet products at impossibly low prices. Amid hanging plasticlobsters and hand-painted signs, a Hawaiian- shirt-clad manager(the “captain”) and employees (the “crew”) explain to first timersthat the prices are not grand opening specials. They are everydayprices.

What is it about Trader Joe’sthat has consumers everywhere waiting with such anxiousanticipation? Trader Joe’s seems to have cracked the customer valuecode by providing the perfect blend of benefits toprices.

High on Benefits

Trader Joe’s isn’t really agourmet food store. Then again, it’s not a discount food storeeither. It’s actually a bit of both. One of America’s hottestretailers, Trader Joe’s has put its own special twist on the foodprice-value equation—call it “cheap gourmet.” It offersgourmet-caliber, one-of-a-kind products at bargain prices, allserved up in a festive, vacation-like atmosphere that makesshopping fun. Trader Joe’s isn’t low end, it isn’t high end, and itcertainly isn’t mainstream. “Their mission is to be a nationwidechain of neighborhood specialty grocery stores,” said one businessprofessor who does research on the com- pany. However you defineit, Trader Joe’s inventive price-value positioning has earned it analmost cult-like following of devoted customers who love what theyget from Trader Joe’s for the prices they pay.

Trader Joe’s describes itselfas an “island paradise” where “value, adventure, and tastytreasures are discovered, every

day.” Shoppers bustle and buzzamid cedar-plank-lined walls and fake palm trees as a ship’s bellrings out occasionally at checkout, alerting them to specialannouncements. Unfailingly helpful and cheery associates in alohashirts chat with custom- ers about everything from the weather tomenu suggestions for dinner parties. Customers don’t just shop atTrader Joe’s; they experience it.

Shelves bristle with aneclectic assortment of gourmet quality grocery items. Trader Joe’sstocks only a limited assortment of about 4,000 products (comparedwith the 45,000 items found in an average supermarket). However,the assortment is uniquely Trader Joe’s, including specialconcoctions of gourmet pack- aged foods and sauces, ready-to-eatsoups, fresh and frozen entrees, snacks, and desserts—all free ofartificial colors, flavors, and preservatives.

Trader Joe’s is a gourmetfoodie’s delight, featuring every- thing from organic broccolislaw, organic strawberry lemonade, creamy Valencia peanut butter,and fair-trade coffees to corn and chile tomato-less salsa andtriple-ginger ginger snaps. Trader Joe’s sells various items thatare comparable to other stores, like organic vanilla yogurt, almondmilk, extra pulp orange juice, smoked gouda cheese, and roastedgarlic hummus. But the quirky retailer also maintains pricing powerby selling things that are uniquely Trader Joe’s. Try findingGinger Cats cookies, qui- noa and black bean tortilla chips, ormango coconut popcorn at any other store.

More than 80 percent of thestore’s brands are private-label goods, sold exclusively by TraderJoe’s. If asked, almost any customer can tick off a ready list ofTrader Joe’s favorites that they just can’t live without—a listthat quickly grows. People go into the store intending to buy a fewfavorites and quickly fill a cart. “I think consumers look at itand think, ‘I can go and get things that I can’t get elsewhere,’”says one food industry ana- lyst. “They just seem to turn theircustomers on.”

Low on Prices

A special store atmosphere,exclusive gourmet products, helpful and attentive associates—thisall sounds like a recipe for high prices. Not so at Trader Joe’s.Whereas upscale competitors such as Whole Foods Market chargeupscale prices to match their wares (“Whole Foods, WholePaycheck”), Trader Joe’s amazes customers with its relativelyfrugal prices. The prices aren’t all that low in absolute terms butthey’re a real bargain compared with what you’d pay for the samequality and coolness elsewhere. “At Trader Joe’s, we’re as muchabout value as we are about great food,” says the company. “So youcan afford to be adventurous without breaking the bank.”

All that low-price talk alongwith consumers’ perceptions is valid. A recent report from DeutscheBank compared prices at Trader Joe’s with those at Whole Foods fora basket of 77 products—a mix of perishable items, private-labelproducts, and non-food items. Trader Joe’s was 21 percent cheaperthan Whole Foods and had the lowest price on 78 percent of theitems. Even when comparing private-label brands, Trader Joe’s was15 percent cheaper. What’s more, Trader Joe’s price advan- tage hasbeen increasing, a point that is particularly telling given thatWhole Foods has focused strategically on lowering its prices overthe past few years.

How does Trader Joe’s keep itsgourmet prices so low? By maintaining a sound strategy based onprice and adjusting the nonprice elements of the marketing mixaccordingly. For starters, Trader Joe’s has lean operations and anear-fanatical focus on saving money. To keep costs down, TraderJoe’s typically locates its stores in low-rent, out-of-the-waylocations, such as subur- ban strip malls. Notorious for smallparking lots that are always packed, Trader Joe’s points out thatspacious parking lots require more real estate and that costsmoney. Its small stores with small back rooms and limited productassortment result in reduced fa- cilities and inventory costs.Trader Joe’s saves money by eliminat- ing large produce sectionsand expensive on-site bakery, butcher, deli, and seafood shops. Andfor its private-label brands, Trader Joe’s buys directly fromsuppliers and negotiates hard on price.

Finally, the frugal retailersaves money by spending almost nothing on advertising. Also, itoffers no coupons, discount cards, or special promotions of anykind. Trader Joe’s unique combination of quirky products and lowprices produces so much word-of-mouth promotion that the companydoesn’t really need to advertise. The closest thing to an officialpromotion is the company’s website or The Fearless Flyer, anewsletter mailed out monthly to people who opt in.

In the absence of traditionaladvertising, Trader Joe’s most potent promotional weapon is itsarmy of faithful followers. If you doubt the importance and impactof fanatical Trader Joe’s fans, just check out the numerous fansites (such as trader- joesfan.com, whatsgoodattraderjoes.com,clubtraderjoes.com, livingtraderjoes.com, and cooktj.com) where thefaithful unite to discuss new products and stores, trade recipes,and swap their favorite Trader Joe’s stories.

Something Extra

Although the simplecalculation of benefits to prices equates to strong value, there’ssomething bigger that plays in Trader Joe’s favor. Beyond all thewonderful and unique products, friendly staff, quirky store design,the combination of all these things pro- duces synergy. It adds upto an atmosphere and kind of trust that eludes most companies. Oneindustry observer who is not a fan of grocery shopping sums it upthis way:

Walking into a Trader Joe’s,my demeanor is noticeably different than when I’m shopping anywhereelse. Somehow I don’t mind

going there. At times—and it’sstill hard for me to believe I’d say this about shopping—I actuallylook forward to it. Trader Joe’s does something pleasant for mybrain, as it does for millions of others. There’s more transparencyin my dealings with TJ’s than most other places. Authenticity issomething you can feel—it’s cru- cial to the buzz. Trader Joe’sproves that even when you get the other elements of the experienceright, people still matter most.

Finding the right price-valueformula has made Trader Joe’s one of the nation’s fastest-growingand most popular food stores. Its 482 stores in 45 states now reapannual sales of at least $13 billion by one analyst’s estimate (theprivate company is tight-lipped about its financial results), anamount that has quadrupled in the past decade. Trader Joe’s storespull in an amazing $1,750 per square foot, more than twice thesupermar- ket industry average. In Consumer Reports’s “BestSupermarket Chain” review, Trader Joe’s has occupied one of the toptwo spots every year for the past five years.

It’s all about value andprice—what you get for what you pay. Just ask Trader Joe’s regularChrissi Wright, found early one morning browsing her local TraderJoe’s in Bend, Oregon.

Chrissi expects she’ll leaveTrader Joe’s with eight bottles of the popular Charles Shaw winepriced at $2.99 each tucked under her arms. “I love Trader Joe’sbecause they let me eat like a yup- pie without taking all mymoney,” says Wright. “Their products are gourmet, oftenenvironmentally conscientious and beautiful . . . and, of course,there’s Two-Buck Chuck—possibly the greatest innova- tion of ourtime.”

Questions forDiscussion

10-18 Under the concept ofcustomer value-based pricing, explain Trader Joe’ssuccess.

10-19 Does Trader Joe’s employgood-value pricing or value- added pricing? Explain.

10-20 Does Trader Joe’spricing strategy truly differentiate it from thecompetition?

10-21 Is Trader Joe’s pricingstrategy sustainable? Explain.

10-22 What changes—ifany—would you recommend that

Trader Joe’s make?