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Final Exam Trader Joes Case Study

1. Supermarket Industry Analysis
In 2013, the traditional supermarket industry is unattractive because of:
a) Existence of powerful substitutes in the form of large discount retailers (Wal-Mart,
Target), warehouse clubs (Costco, Sams Club, BJs, and pharmacy chains (CVS,
Walgreens) that have increased emphasis on grocery sales.
Because increased traffic leads to increased sales of higher margin items in retail
stores, there is growing attractiveness for retail stores to enter grocery industry
Retail leaders such as Wal-Mart and Target run highly efficient operations.
Coupled with a large volume sale philosophy, both are able to take market share
from traditional supermarkets through significant price cuts. As such traditional
supermarket share has dropped in last year from 67% to 51% with the growth of
retailers participating in grocery sales
Lack of differentiation across products and brands gives consumers a high
degree of bargaining power because they incur little to no switching costs
between rival competitors and brands (see below) and because of the growth of
substitutes. Customers who want to do all their shopping both retail and grocery
supplies either in small volume purchases or in bulk have many options to
choose from (Wal-Mart vs Schnucks vs CVS vs Costco)
b) Strong competitors across all segments of supermarkets, which can be broken down
into traditional, premium, and discount stores,
The supermarket industry is traditionally a low profit margin industry and these
margins are becoming increasingly smaller as traditional supermarkets face the
challenge of price competition from both small discount stores and from strong
substitute retail stores such as Walmarts that offer a comparably large inventory
of grocery products at low prices
Low supplier power contributes to the relative state of competition within the
industry as suppliers compete for contracts with large volume buyers such as
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Wal-Mart. Traditional supermarkets can expect higher prices from their
suppliers. Firms such as Trader Joes that have exclusivity with private labels also
makes it difficult for competitors to source from the same suppliers.
Again, high bargaining power of customers and relative ease of switching
between different grocery stores increases competition as firms seek to adjust
prices and offer different products to entice customers
c) While the threat of new entrants is low because it is highly difficult for new entrants to
compete with strong incumbents, this further highlights the already intense rivalry that
exists within the industry
Economies of scale for the market leaders, i.e. Whole Foods , or substitute retail
stores, i.e., Walmart, both of whom who can produce high volumes with low
costs
Capital investments to become a major player are high and difficult to establish
means of differentiation among well-branded/recognized players
2. Financial Ratio Analysis and Strategy Reflection
Financial ratio analysis highlights how traditional supermarkets are finding themselves
squeezed between premium players such as Whole Foods and discounters such as Aldi.

Implications of analysis are as follows:
a) For both Kroger and Safeway, financial analysis indicates a real lack of strategy and
competitive advantage. They are neither differentiators nor low cost options. This is
evident in the following ways:
Whole Foods Kroger Safeway
ROE 11.45% 15.18% 14.01%
ROA 7.98% 2.56% 3.43%
ROS 3.39% 0.67% 1.18%
Debt to Equity 43% 492% 309%
SGA/Sales 30% 19% 24%
COGS/Sales 65% 79% 73%
Operating Profit 5.42% 1.41% 2.60%
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Operating margins are thin at 1.41% and 2.60% and ROS are also low at
0.67% and 1.18% respectively. Much of this is driven by the inability to price
compete due to lack of product differentiation in the traditional supermarket
space. COGS/Sales for both companies are over 70% indicating competition
for suppliers who are not incentivized to provide low price or discounts to
traditional supermarkets especially with strong substitute players such as
Wal-Mart and Costco who can buy in large volume.
Both Kroger and Safeways high debt to equity ratio, 492% and 309%
indicates an inability to finance growth without incurring large amounts of
debt and should be a major concern given a low ROS and operating profit
margin. The amount of debt being taken on is not being justified by the
earnings.
b) Whole Foods position as leading retailer of organic and natural foods is evident when
comparing its numbers across the board with these two traditional supermarkets.
While COGS/Sales is only slightly lower at 65%, both ROA 7.98% and ROS
3.39% are much higher. Whole Foods differentiates itself through selling
premium products for which they can charge higher prices for and receive
better deals with their suppliers for due to brand image among consumers.
WF generally doesnt carry nearly as much inventory as supermarkets, but
has higher markups on its products.
The above strategys success is reflected in a much higher operating margin
of 5.42% and an above average ROE of 11.45%. Comparison to Kroger and
Safeway in ROE is not useful due to their inflated numbers, which is evident
when comparing debt to equity ratios for all three firms. Whole Foods debt
to equity ratio is only 43% compared to 492% and 309%
Higher SGA/Sales percentage of 30% (compared to 19% and 24%) could
indicate more well paid staff and therefore better customer service.

3. Key Sources of Competitive Advantage
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Trader Joes competitive advantage stems from several sources that include 1) remarkable
consistency in strategy from both an internal and external fit perspective, 2) added value
through differentiation that drives up customers willingness to pay while maintaining a
relatively lower cost structure, and 3) competitively valuable resources in the form of a
system of difficult to imitate or substitutable activities.
a) Trader Joes system of activities demonstrates both internal and external fit
Operationally, most stores are less than 15,000 square feet and are in suburban
locations in order to best serve their target market. The small space adds to
the quirky, adventure, and inviting feel that Trader Joes is celebrated for
by its customer segment who actively seek this kind of environment. And even
though the spaces are relatively small, some analysts believe that Trader Joes
has doubled the sales per square foot achieved by Whole Foods.
Trader Joes only carries about 4,000 SKUs per location, 80% of which though are
private label items that constantly change that adds to the mystique and cool
factor they try to exude. They are not a place to go to get staples and so they
do not target that customer base. This also allows them to maintain a dynamic
product mix that is in line with former CEO Coulombes scarcity strategy, and
that in turn builds upon their relationships with suppliers. Suppliers enjoy free
product placement, prompt payment, and develop brand attractiveness by being
in the store, but in turn are also required to be innovative and maintain secrecy.
The mutually beneficial relationship with suppliers and lack of active marketing
(therefore lower costs) allows Trader Joes to pay their employees more and
build upon the customer experience within the store. The people Trader Joes
hires are the people to whom they want as their customers. Happy, extroverted,
well-informed, and motivated employees create an environment that is cool, fun,
and in turn, leads to self-marketing through word of mouth from customer to
customer, employee to friends who become new customers, and so forth.
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Trader Joes store locations are in line with the types of customers they want to
attract. Their slow location expansion and growth is in line with their quirky
style thats unlike most firms.
b) Trader Joes could be considered as having a dual competitive advantage as both a low
cost and differentiated player. While Trader Joes has certainly increased customers
willingness to pay by offering both a differentiated shopping experience and a
differentiated product line, it is more difficult to argue they are truly low cost. But
Trader Joes is low cost compared to premium competitors and there is a perception
of low cost in comparison to traditional supermarkets. Reasons follow for both
differentiation and low cost:
Private quality labels with interesting brand names that disappear forever appeal
to their targeted customer segment who dont necessarily come into the store to
buy everything they need but rather for a couple items; and then end up walking
out with something new and fun as well
Trader Joes marketing strategy through the Fearless Flyer and radio spots adds
to its charm and appeal. Customers are willing to actively market for Trader
Joes and this serves as a further point of differentiation.
Knowledgeable employees that are constantly visible stocking shelves, walking
customers to products, chatting with customers, and providing an uplifting mood
within the store itself is a differentiated service that adds to customers
experience and willingness to pay.
No discounts or coupons and no questions asked return policy give the
perception that everything is on sale and at low cost.
c) Trader Joes system of activities that is effectively exploited through a consistency of
internal and external fit is a competitively valuable resource that will be hard to imitate
and substitute for especially given its strong brand image and the satisfaction of the
current customer base. In fact, the growing outcry for more stores despite growing
number of substitutes and already strong incumbents in the supermarket industry, is an
indication of this competitive advantage
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More specifically, the types of employees who subscribe to the philosophy of
Trader Joes, the cult-like following of customers who active difficulty market for
the firm and generate more appeal, and the innovative dynamic product line
that allows Trader Joes exclusivity with many suppliers are all competitively
valuable resources
4. Threats to Trader Joes Competitive Advantage
Given the previous assessment of Trader Joes competitive advantage and its competitively
valuable resources AND the unattractiveness of the industry as a whole, it seems unlikely
for Trader Joes to experience any kind of external threat.
Traditional supermarkets will find it difficult to become differentiated players
especially with both Trader Joes and Whole Foods dominating this type of segment,
and new entrants will face the same difficulties.
Smaller format experiments from retailers such as Target, Giant, and Publix will end
up competing against each other for thin profit margins and unless they are truly
able to offer a differentiated product line from the standard grocery products, it is
unlikely for them to be a threat.
Farmers Markets do not offer an expansive enough range of products nor
adventure and friendly customer experience that can match Trader Joes.
Online grocery stores such as Amazon will not .be able to replicate nor replace the in
store experience and charm that Trader Joes offers. However, Trader Joes must be
careful that customers do not have the ability to come into the stores to find new
products without purchasing them, and then going online to buy them for lower
costs. This seems unlikely since purchases to tend to be spur of moment and
customers will continue to for the foreseeable future prefer to be able to see, hold,
and touch grocery products they want to buy
One potential threat that Trader Joes should be wary of is hold-up from their suppliers, whom
they rely heavily on due to standing mutually beneficial relationship to drive their scarcity
and innovation of food philosophy. Whole Foods has the ability to attract these suppliers
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although it remains questionable as to whether they will be able to take away customers as a
premium retailer with much larger spaces and a wholly different philosophy.
5. Strategy Moving Forward
Trader Joes current competitive advantage seems sustainable and so they should not alter
their current strategy going forward unless market conditions change that allow for new
entrants to position themselves well to challenge Trader Joes brand image. Trader Joes
could take into consideration the following three points:
1) The employee base that wholly subscribes to the philosophy and strategy of Trader Joes
is an important and valuable resource that must be maintained. Growing bureaucracy
through new processes and procedures that lead to competition among employees and
damage the happy and motivated environment needs to be taken into control.
Consider giving longstanding employees equity share so that they have an incentive to
do whats best for the firm
2) Test marketing through social media and innovative technology that does not detract
from the mystique and appeal of Trader Joes, but rather complements it and therefore
in part shows its customers that it is paying attention and taking note of their efforts to
promote their beloved store. Having a growing yet controlled voice in the digital media
space will be important as customers continue to become more tech savvy
3) Acquiring major suppliers that produce their highest grossing and popular product lines
to avoid losing them to competitors. Trader Joes could also consider starting their own
brand of products (small range to keep it manageable).