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Trader Joe's HBS Case Analysis 12.2016

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Trader Joe's HBS Case Analysis 12.2016

  1. 1. Matthew W. Burr MBC 645: Case Analysis- Trader Joe’s Strategic Management Introduction: The supermarket industry has evolved throughout last half century, with market share decreasing. Competitive strategies currently utilized, vary throughout the industry. As competition is fierce and consumer demands continue to drive change. This case analysis will focus on Trader Joe’s and their competitive strategy and their sustainability. The analysis will also compare Trader Joe’s to specific industry competition and their current strategies. As we analyze the case, we will focus on four questions. The first, a review of how firms in the supermarket industry make money, while focusing on their unique competitive strategies. The second, key sources of Trader Joe’s competitive advantage and how these sources support competitive strategy. The third, choosing what not to do, illustrating Trader Joe’s approach. The fourth, threats to Trader Joe’s competitive advantage and the sustainability of the competitive advantage. The analysis will end with a brief conclusion summarizing key learnings and keys for sustainability. Prior to answering the four questions, the introduction will focus on a high-level review of the supermarket industry. The industry; “Wal-Mart, Kroger, Safeway and Supervalu were the four largest grocers in the United States…Supermarkets traditionally operated on very thin profit margins.”i Throughout the years the industry has evolved mostly into a high end premium market or a discount market. Most organizations have evolved into either a premium brand or discount store to maintain and thrive in the changing industry. “Several experienced financial distress…The Great Atlantic and Pacific Teac Company had filed for bankruptcy protection in December 2010.”ii However, during the same period other organizations thrived. “In 2012 Whole Foods achieved 8.4% same-store sales growth.”iii A decline in the past decade in grocery sales is significant for all supermarket chains, “their share of grocery sales in the United States fell to 51% in 2011…a decade earlier, supermarkets had accounted for two-thirds of all grocery sales in the nation.”iv Supermarkets have lost ground to large discount retailer, warehouse clubs and pharmacy chains, as these organizations have expanded and grown grocery lines. To fully understand the evolution of the industry, we begin by understanding how firms maintain financial viability. 1. How do firms in the supermarket industry make money? Illustrate the competitive strategies of the main companies in the supermarket industry to help support your answer. Supermarkets make money through multiple channels. As discussed throughout the introduction, the industry has for the most part consolidated into either a premium (specialized products) or low cost (discount products). “Whole Foods Market ranked as the nation’s leading retailer of organic natural foods…two-thirds of its sales consisted of perishable items, including baker and prepared foods…in 2012 Whole Foods achieved 8.4% same-store sales growth.”v Trends and consumers’ willingness to pay a premium for the organic natural foods found at supermarkets like Whole Foods, allows these organizations to grow profits and remain viable.
  2. 2. As shown in Appendix B, this is a focused differentiation strategy. The supermarket chain charges a premium and consumers continue to pay the premium for these products. A low-cost store such as Dollar General operates 10,000 locations and carry’s a variety of products. “The average customer completed a shopping trip in roughly 10 minutes…the company reported same-store sales growth of 4.7% in its 2012 annual report.”vi Dollar General focuses on a cost leader strategy as show in Appendix B, the goal is to sell bulk product at a discounted price. All supermarkets focus on one of five categories as shown in Appendix B. Kroger, Safeway and Supervalu all fall into one of these four categories. Market growth includes carrying a variety of products. Traditionally, store size and SKUs determined financial viability. “Whole Foods locations typically carried 21,000 SKUs…Dollar General’s stores typically carried approximately 10,000 SKU’s and had 7,200 square feet…Wal-Mart had become the largest grocery retailer…supercenters average of 185,000 square feet and over 100,000 SKU’s.”vii The more product in-store, the more a customer is willing to spend. “Like Wal-Mart, Target found that grocery sales drove store traffic, leading to increased sales on higher-margin items such as apparel and electronics.”viii As the climate has changed in the industry, so too has what is being offered. Stores must sell other products to survive this ever-changing business climate, as Wal- Mart, Target and Dollar General have shown. Supporting functions for supermarkets include; frequent shopper clubs and discount coupons. This provides incentives for loyalty and rewards for continued shopping. Trader Joe’s has approached the industry differently, “the typical Trader Joe’s store had less than 15,000 square feet…carried about 4,000 SKUs per location.”ix The organization carries minimal brand name merchandise, does not offer or accept coupons and spends little on marketing. In reviewing Appendix B, Trader Joe’s is an integrated cost leader/differentiator, they have found the blue ocean. This unique approach has provided a niche market for Trader Joe’s to grow locations and financial viability. The common process that all supermarkets have is strong buyer power as seen in Appendix A, the Porters Five Forces Analysis. A strong supply chain provides leverage for any supermarket and has the potential to determine how and if a firm makes money and remains viable. The way in which firms make money continue to vary and are driven by consumer demands. Each organization falls into one of the categories in Appendix B and has found success with their unique approach. Whole Foods, Kroger, Safeway, Supervalu, Trader Joe’s, etc., serve differing market segments. 2. What are the key sources of Trader Joe’s competitive advantage? How do these sources support its competitive strategy? In reviewing Appendix C, the Value Chain Analysis for Trader Joe’s. Every area outlined on the value chain account for Trader Joe’s unique competitive advantage. As the arrows indicate, there is overlap throughout the value chain that create Trader Joe’s competitive advantage. Beginning with support activities and firm infrastructure; the organization has seven core values (and embraces the values) and is secretive about financial information (Aldi’s Model). “The company did not disclose financial results, but most analysts believed that it achieved higher returns on investment than most supermarkets in the nation.”x Continuing to Human Resources; Trader Joe’s also believes in paying employees well, provides a structured
  3. 3. orientation/training process and creates a generalist not specialist approach in the work environment. The generalist expectations are as follows; all employees will understand specific products and processes throughout the location (subject matter experts). Trader Joe’s approaches technology differently than competition; they do not utilize sell-checkout and did not invest in front-end display televisions. Strategic advantages in the supply chain include; Trader Joe’s purchases of large quantities of product, driving the price down for customers, sourcing product globally and expect vendors to be secretive about agreed upon product prices. Beginning with inbound logistics, that continues to create a competitive advantage, “Trader Joe’s carried about 4,000 SKUs per location, as compared with as many as 50,000 unites for most grocery stores. Eighty percent or more of the products in Trader Joe’s store consisted of private label items.”xi Trader Joe’s also restocks shelves during the day, ensuring that products are always on the shelf for consumers. Location’s “could be found in old strip malls in suburban locations…typical Trader Joe’s sores had less than 15,000 square feet of selling space.”xii These unique locations provide a cheaper option for rent or property purchase and opportunities to be near the customer base. Trader Joe’s approaches marketing and sales differently when comparing to the industry norm. “Trader Joe’s marketed primarily through its Fearless Flyer as well as occasional radio ads, and never ran television ads…Many customers had leader about Trader Joe’s through word of mouth.”xiii They do not have a customer loyalty-card program or accept coupons. Trader Joe’s does not have a presence on social media, regardless, they “enjoyed a cult-like following.”xiv They utilize word of mouth marketing, which in turn has created a very loyal and passionate customer base. As other supermarkets spend millions of dollars in advertising, loyalty programs and public relations, Trader Joe’s spends almost nothing in public relations. The final primary activity in Appendix C is service. As Trader Joe’s pays a higher rate, good benefits and utilizes a generalist not specialist approach; this employee relations model creates a more aligned and strategic customer service experience. “Trader Joe’s wanted its employees to become familiar with the company’s products and therefore encouraged them to try various items throughout the store.”xv Many organizations forget the tremendous impact that customer service and employee loyalty can and does have on an organization. Trader Joe’s understands the importance of customer service and lives it through the seven core values covered in new hire orientation and training program. The competitive advantages as outlined in Appendix C are all significant to the success of Trader Joe’s competitive strategy. The overlapping allows the organization to maintain and grow a unique advantage. Keeping prices low, financial information secretive, minimal technology costs, a global supply chain, tremendous perks for employee’s and outstanding customer service drive Trader Joe’s competitive strategy. Trader Joe’s successfully serves a specific market and embraces who they serve through convivence, customer service, pricing and unique offerings. 3. Porter (1996) tells “the essence of strategy is choosing what not to do”. How would use the Trader Joe’s case to illustrate this point? The essence of effective strategy is choosing a path (less traveled or finding a blue ocean) unique to that of your competitors. Most organizations attempt to provide a service or product
  4. 4. that differs from that of the competition. Creating a memorable experience and developing a cult like following continues to define Trader Joe’s strategy and separate this organization in a very competitive industry. Trader Joe’s utilizes many strategies for a unique customer experience. Store square footage is significantly smaller then competition, while locating stores in old strip malls for the convivence of the customer. SKU’s are kept at 4,000 per location, comparted to 50,000 for other supermarkets. “Trader Joe’s buyers scoured the globe for interesting new products and tried not to follow trends…merchants strove to introduce 10-15 new products per week.”xvi The organization eliminates 10-15 products each week as well and has minimal brand names in each location. Trader Joe’s knows the customer base very well, “claimed that 80% of its customers had attended college.” xvii There is very little information divulged to the public regarding financials and the organization spends next to nothing on marketing. The organization has a loyal customer base and employee base. Cross-training employees into a generalist subject matter experts, creates a unique and satisfying customer experience. Competitors have opened facilities throughout the country, Trader Joe’s is strategic about when and where to open locations, creating an extreme demand in a city or region. This again provides an advantage and as proven, “David Stinson walked in first when the store opened its doors for the first time…Stinson had camped out overnight to be first in line, having arrived at 4:00 p.m. the pervious afternoon.”xviii This case is a complete example of the 1996 quote by Porter. Trader Joe’s has positioned themselves in an integrated cost leader/differentiator category and sits in a blue ocean in a competitive industry. Trader Joe’s has flourished and grown in a time of economic instability. “Based on surveys of employees, Forbes and Glassdoor.com ranked Trader Joe’s on their 2013 list of the “Top 50 Companies to Work For” in the U.S.”xix The organization does what competitors do not and cannot duplicate. Trader Joe’s is extremely successful in utilizing this strategy to grow and expand operations. 4. What are the main threats to Trader Joe’s competitive advantage? Is there advantage sustainable? Currently, Trader Joe’s has a unique competitive advantage. However, there are threats to this competitive advantage. Wal-Mart and other stores have experimented with smaller locations throughout the country. “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.”xx Appendix D provides a SWOT analysis for Trader Joe’s. Current threats include; increased rivalry within the industry, copying the Trader Joe’s strategic model, lack of technology/online presence and substitute brands. “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 it’s Fresh & Easy stores.”xxi Tesco was unsuccessful in the United States, that does not mean that other industry competition will not try and imitate or copy the Trader Joe’s concept. Other threats include new competition, local co-ops, e-commerce (Amazon) and a shift in consumer preference. Trader Joe’s has resisted increased technology in the stores and has little presence on social media (mostly customers). “Some experts bemoaned the absence of a company-led
  5. 5. social media strategy…marketing experts concur that not having an authoritative voice in social media is a weakness.”xxii This has the potential of becoming a threat to Trader Joe’s competitive advantage, as e-commerce and social media use expands globally. The threat of substitute and brand name products is also a concern for Trader Joe’s and the current competitive advantage. Brand loyalty is significant, Trader Joe’s does not stock a significant amount of name brand products in stores and this could become a strategic threat in the future. An additional threat is corporate growth. “Kowitt cited other ex-crewmembers who worried about growing bureaucracy at the company as it implemented new process and procedures…recent changes had led to increased competition among employees seeking advancement.”xxiii Opportunities include; continued nationwide growth, social media marketing, e-commerce presence and potential international growth. At the current time, Trader Joe’s competitive advantage is sustainable and not threatened, they are in a blue ocean alone. As we learned through the Tesco example, imitating Trader Joe’s is a challenge and it led to the failure of their venture in the United States. Copying every intricate detail of a privately held company is almost impossible. Trader Joe’s has developed a brand through customer loyalty and word of mouth advertising. This would be complex to duplicate, as it took decades to establish. The organization has developed longstanding and powerful relationships with their suppliers, employees and unique customer base. Trader Joe’s is strategic in regards to the locations of new stores and the number of stores which are opened per year. This creates a demand that cannot be matched by a Wal- Mart, Kroger, Safeway, Aldi or Supervalu. The final and most important part of Trader Joe’s sustainability and competitive advantage is the organizational culture. The culture created internally at Trader Joe’s is impossible to copy or imitate. “Some observers marveled at how happy the crewmembers always seemed…crewmembers often chose to hang out together after work.”xxiv Creating a culture of happy, loyal and hardworking employees is a challenge for most organizations. Trader Joe’s has developed a culture that is unique in the supermarket industry and has proven to be a cornerstone of the organizations continued success. However, as the corporation grows, sustaining this culture will become challenging and can become a threat. Currently, the competitive advantage is sustainable in a very competitive industry. Conclusion: The case analysis has provided examples of the unique advantages Trader Joe’s currently has in a competitive industry. The successful strategy is to do what others are not doing, finding a blue ocean. Since the organizations founding almost 50 years ago, Trader Joe’s has developed a cult like following, as they continue to grow and open stores nationwide. Trader Joe’s serves to a specific group of customers. The group continues to remain loyal. The Five Forces, Value Chain Analysis and SWOT Analysis; provide insight into the supermarket industry, Trader Joe’s competitive advantage and current opportunities and threats that could help or harm Trader Joe’s competitive sustainability in the future. Like any organization, as the corporation grows, culture evolves. Currently, Trader Joe’s has a culture unmatched by the competition. The case analysis provides valuable insight into creating and maintain a unique and sustainable competitive advantage in a very competitive, shrinking and ever evolving industry.
  6. 6. References i Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. ii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. iii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. iv Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. v Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. vi Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. vii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. viii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. ix Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. x Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xi Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xiii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xiv Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xv Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xvi Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xvii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xviii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xix Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xx Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xxi Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xxii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xxiii Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing. xxiv Ager, D., & Roberto, M. (2014). Trader Joe’s. HBS No. 9-714-419. Boston, MA: Harvard Business School Publishing.
  7. 7. Appendix A Porter’s Five Forces: Supermarket Industry
  8. 8. Appendix B Five Business Level Strategies
  9. 9. Appendix C Trader Joe’s Value Chain Analysis Firm Infrastructure Human Resource Management Technology Development Procurement Inbound Logistics Daily Restocking Less SKU’s Operations Small Stores Less SKU’s Private Labels Strip Mall Locations Small Parking Lots Limited Locations Outbound Logistics Store Locations Marketing & Sales No Sales No Coupons Fearless Flyer No TV Minimal Radio Word of Mouth Marketing Service Generalist not specialists Knowledgeable Workforce Products SupportActivities Primary Activities Values, Aldi’s Model: No Public Relations New Hire Orientation, Generalist Not Specialists, High Pay for Employees Purchase Large Quantities, Global Purchasing, Unique Products, Vendor Relationships No TV’s, No Self-Checkout
  10. 10. Appendix D Trader Joe’s SWOT Analysis TRADER JOE’S SWOT ANALYSIS STRENGTHS (+) • Brand Credibility- Aldi’s •Customer Loyalty •Strong Distribution Channels •Employee Training and Generalist Approach WEAKNESSES (–) •Geographic Coverage: Not Located in Every State •No Advertising and Minimal Marketing •Not Accepting Coupons •No Private Labels OPPORTUNITIES (+) •Private Labels •Nationwide Locations •Online and Marketing Presence •Case Did Not Mention International Growth THREATS (–) •Growing Competition within the Industry •Competition Copying Trader Joe’s Model •Lack of Technology •Substitute Products S O W T Integrated Cost Leader/Differentiator

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