What Megan McArdle and her neighbors love about Trader Joe’s is not a particular product, or even the store’s subtle hippie aesthetic, but its business model:
That business model can be summed up in two things: “private label” and “low SKUs.” Private label is self-explanatory; Trader Joe’s house-brands most of its products, which means they’re cheaper (no need to pay for all those national advertising campaigns).
But maybe you already realized that. It’s the low SKUs that really offer a hidden benefit to millions of unwary shoppers. SKU is an industry acronym for a “stock-keeping unit,” a.k.a. “one product.” The average grocer carries nearly 50,000 SKUs. Trader Joe’s, by contrast, carries only about 4,000. That’s an immense difference — though you’ll only realize how immense when you think through the implications.
Real estate, for instance. The new Trader Joe’s near my house is, by the standards of a Trader Joe’s, quite roomy, with wide aisles and lovely high ceilings. But compared to the local grocery stores, it’s still compact. In a dense, urban area like Washington, that’s a big savings on rent — which can be passed on to you in lower prices.
The advantages hardly stop there. When you only have a few SKUs, all of which have to earn their place on the shelf by selling briskly, you end up with less spoilage than a normal grocery store. Given the razor-thin margins typical of the industry, spoilage can be the difference between turning a profit and running into the red. Minimizing your SKUs gives you even more room to cut the prices on the products you do sell.
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The thing about having 50,000 SKUs (or 100,000, as is typical of a Walmart) is that no employee can be familiar with more than a small fraction of them. It is not possible, in such a place, to deliver the kind of service that Trader Joe’s does. For example, the new outlet’s store captain, Rebekah Eagle, told me that the store regularly holds employee tastings to familiarize the staff with what they’re selling. A great idea, with a limited stock selection; not feasible in a conventional grocery. And since it is actually impossible for front-line workers at conventional stores to deliver Trader Joe’s-level service, it doesn’t necessarily make business sense to invest in the kind of training and retention policies that Trader Joe’s does.
The private-label branding allows Trader Joe’s to attract loyal customers with cheap prices. And the low number of SKUs allows it to generate extremely high revenue per square foot, enabling it to pay the rents even in expensively dense urban areas and to lower prices even further. It’s a pretty neat trick, if you can manage it.
Just how successful is Trader Joe’s? There are only 485 stores nationwide, and eight states do not have a single store. The closest ones to me are the two (2!) in Columbus, OH, almost 60 miles away.
Whole Foods is smaller, maybe 470 stores nationwide, and one in Columbus.
Kroger operates almost 2,800 stores, and Walmart nearly 7,000 stores.
Trader Joe’s and Whole Foods are curiosities serving an arrogant bigoted elite.
Too many SKUs. https://www.youtube.com/watch?v=3PgbNQU3cYo
Trader Joe’s is like an inefficient, unambitious Costco for people too high class to go to Costco.
Costco has low SKU and huge private label like Trader Joe’s, but it also features cheap prices for brand names and further cost reductions thanks to bulk. The fact that Costco profits from selling memberships and Trader Joe’s from selling groceries makes all the difference in the world as far as the experience is concerned.
Bob,
Was that sarcasm or are you stupid? I’ll give the benefit of the doubt since its a Monday morning. The article excerpt was about what seems to be fairly smart business practices.
Anywho, there’s a TJ not far from us, but frankly there’s nothing really there that I like all that much. Got some good apples there once. Once. If others like that stuff, good for them.
Whole Foods is crazy expensive, and the staff are often hippie/idiots with amazingly large egos for being cashiers or shelf-stockers. Fuck, that.
A rather large number of businesses went bust in the middle and late 1980′s because a lot of money was available from downsizing elsewhere (the giant wave of mergers) and there was a lot of bad consulting advice about where to put businesses. Franchisees lost loads of money while the franchisers still made big profits, something of a scam at time. The importance of large chains putting their businesses in the optimal locations cannot be understated. TJ’s seems to have been uncommonly good at choosing locations that work well for their particular brand. I recall in Santa Barbara they temporarily set up shop across Milpas Street from the very long established food co-op, under-cutting their prices. As soon as the food co-op folded they moved about six blocks over to be next to the freeway. Location, location, location.
I don’t really buy any of this article, but maybe it’s because I don’t really like Trader Joe’s food selection, or their stores.
The last time I seriously made a price comparison for food shopping was around 2000. Stores were experimenting with putting their inventory online, so you could look through their inventory online and then pick up bags of groceries on your way home. This enabled me to compare exact item-for-item prices for national brands for about 100 different products that I bought for my family.
Anyway, I found that if you bought at Sam’s Club (similar to Costco) as opposed to typical regional grocery store chains, you saved about 40% overall. If you had a family, especially a large family, you’d be nuts to shop anywhere else, at least for staples.