Trader Joe’s competitive advantage

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. WalMart, the world’s largest retailer, had experimented with its Neighborhood Markets concept since

1. 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 WalMart’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
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   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 fulltime 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

Case study

instruction“What role was played by human capital in Trader Joe’s competitive advantage?
How is this role similar or different from the role of human capital in your company (if you have a job) or any other company (if you are not currently employed)?”