Trader Joes Analysis

Firms in the supermarket industry operate on a small profit margin. By analyzing the Comparative 2011 Financial Performance, exhibit 2 in the Harvard Business School article “Trader Joes” by David Ager and Michael Roberto, the profit margin of the four stores varies from 1-3%. According to Forbes, the average profit margin forms their study was 2.5% in 2016. On one end there are higher priced items, specialty foods, and perishable-prepared foods. On the other end of the spectrum, there are discount stores. These stores operate on volume of product, mostly nonperishable items. “To succeed, companies in industries with typically small margins need to bulk up their sales volume”(Biery par. 1). 

The differing strategies of the four firms can be reflected in the financial ratio analysis. Of the four firms, the lowest revenue is Whole Foods; yet Whole Foods has the highest return on assets (ROA). In the age of food insecurity, their customers are willing to pay more for the organic products making Whole Foods the nation’s leading retailer in natural organic foods. The highest revenue is Kroger. They also have the highest asset turnover, showing they are efficient at deploying their assets. Kroger focuses on volume at a discounted price. These factors mean they have higher revenue that results in market growth.

The results of the financial ratio analysis show differing ways the firms in the industry can deliver strong financial returns. The economies of scale can create an environment of a larger scale or accept a cost disadvantage. Products are differentiated into the higher end and the volume value products. The Higher SG&A as % of sales is reflected from their higher in house sales of prepared foods, salaries, and benefits at Whole Foods (Kobayashi-Solomon). Kroger focuses on the lower cost of prepared foods, salaries and focuses on advertising, space, and administration.

Trader Joe’s appears to have bargaining power with their suppliers and bargaining power with their customers. The introduction of new products allows them to remove the products that do not sell. The dynamic product mix is not accepted universally, although Costco follows a similar method, and many of their customers may see it as a treasure hunt. The small footprint keeps operating cost low. Fan-Based marketing and, minimal advertising lowers operating cost. The strategy to invest in employees can be reflected in the customer’s experience. Trader Joe’s places stores, as founder Coulombe said in the article, “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” (Ager and Roberto 2). This advantage appears sustainable if the leadership maintains course, despite any growing pains. 

I agree with writer Beth Kowitt on page 10 who questions the longevity of the “quirky” charm the stores cultivate. The main threats to the competitive advantage of Trader Joe’s are maintaining the feel of the store. The success is driven by the fans clamoring for a store to be open near them. The success of Trader Joes also comes from the perceived value of the products. If mainstream corporations like Pepsi are supplying what customers believe to be healthy food coming from a small business and the customers do not like that, the loyalty may be eroded. Secrecy has been their friend abut it could also be their undoing. 

Trader Joes appears to currently have a good strategy. They are succeeding in a competitive market with a low-profit-margin. Moving forward I would modify the strategy of keeping suppliers secret. The perception is that Trader Joe’s customers are getting wholesome, ethically sourced products. They could disclose suppliers that support that perception, strengthening their base. It may open a flood gate for disclosure that Trader Joes may not want to disclose.

Whole foods can accurately be seen as a competitor with Trader Joes (Huddleston). Even though certain products may cost more at Whole Foods, the supermarket offers similar products to Trader Joes, and in fact, more products. Whole foods pose a threat to the operation of Trader Joes as it corners the same market segment, offers better products, a larger quantity of products and can cater to a wider variety of consumers thanks to its marketing campaign. Whole Foods is just one of many competitors which Trader Joes must face against in this grocery market.

Works Cited

Ager, David and Robert, Michael. “Trader Joe’s.” Harvard Business School, 8 Apr. 2014, https://www.hbs.edu/faculty/Pages/item.aspx?num=45557. Accessed 25 Dec. 2018.

Biery, Mary. “The 15 Least Profitable Industries in the U.S..” Forbes, 3 Oct. 2016, https://www.forbes.com/sites/sageworks/2016/10/03/the-15-least-profitable-industries-in-the-u-s/#6e470f6e618a. Accessed 25 Dec. 2018.

Huddleston Jr., Tom, “Whole Foods rings up strong sales.” Fortune, 11 Feb. 2015, http://fortune.com/2015/02/11/whole-foods-same-store-sales/. Accessed 25 Dec. 2018.

Kobayashi-Solomon, Erik. “What Growth? A Step-by-Step Valuation of Whole Foods Market.” Forbes. 10 Dec. 2015, https://www.forbes.com/sites/erikkobayashisolomon/2015/12/10/what-growth-a-step-by-step-valuation-of-whole-foods-market-wfm/#4e18a6e6a682. Accessed 25 Dec. 2018.

Kowitt, Beth. “Former Trader Joe's exec has a plan to feed the hungry, not landfills” Forbes, 4 Sept. 2014, http://fortune.com/2014/09/04/waste-not-want-not/. Accessed 25 Dec. 2018.