Trader Joe's: Cheap GourmetPutting a Special Twist on the Price-Value Equation

Apple Store openings aren't the only place where long lines form these days. Early on a summer morning, there's a crowd gathered, eagerly awaiting the opening of a Trader Joe's outpost. The waiting shoppers discuss all things Trader Joe's, including their favorite items. One customer suggests the chain will be good for the neighborhood even though there are already plenty of grocery stores around, including various upscale food boutiques.

This is a scene that plays out every time Southern California-based Trader Joe's opens a new storesomething that only happens a handful of times each year. Within moments of a new opening, a deluge of customers makes it almost impossible to navigate the aisles. They line up 10 deep at checkouts with carts full of Trader Joe's exclusive $2.99 Charles Shaw wineaka "Two-Buck Chuck"and an assortment of other exclusive gourmet products at impossibly low prices. Amid hanging plastic lobsters and hand-painted signs, a Hawaiian shirt-clad manager (the "captain") and employees (the "crew") explain to first timers that the prices are not grand-opening specials. They are everyday prices.

What is it about Trader Joe's that has consumers everywhere waiting with such anxious anticipation? Trader Joe's seems to have cracked the customer value code by providing the perfect blend of benefits to prices.

High on Benefits

Trader Joe's isn't really a gourmet food store. Then again, it's not a discount food store either. It's actually a bit of both. One of America's hottest retailers, Trader Joe's has put its own special twist on the food price-value equationcall it "cheap gourmet." It offers gourmet-caliber, one-of-a-kind products at bargain prices, all served up in a festive, vacation-like atmosphere that makesshopping fun. Trader Joe's isn't low end, it isn't high end, and it certainly isn't mainstream. "Their mission is to be a nationwide chain of neighborhood specialty grocery stores," said one business professor who does research on the company. However you define it, Trader Joe's inventive price-value positioning has earned it an almost cult-like following of devoted customers who love what they get from Trader Joe's for the prices they pay.

Trader Joe's describes itself as an "island paradise" where "value, adventure, and tasty treasures are discovered, every day." Shoppers bustle and buzz amid cedar plank-lined walls and fake palm trees as a ship's bell rings out occasionally at checkout, alerting them to special announcements. Unfailingly helpful and cheery associates in aloha shirts chat with customers about everything from the weather to menu suggestions for dinner parties. Customers don't just shop at Trader Joe's; they experience it.

Shelves bristle with an eclectic assortment of gourmet-quality grocery items. Trader Joe's stocks only a limited assortment of about 4,000 products (compared with the 45,000 items found in an average supermarket). However, the assortment is uniquely Trader Joe's, including special concoctions of gourmet packaged foods and sauces, ready-to-eat soups, fresh and frozen entrees, snacks, and dessertsall free of artificial colors, flavors, and preservatives.

Trader Joe's is a gourmet foodie's delight, featuring everything from organic broccoli slaw, organic strawberry lemonade, creamy Valencia peanut butter, and fair-trade coffees to corn-and-chile tomato-less salsa and triple-ginger ginger snaps. Trader Joe's sells various items that are comparable to other stores, like organic vanilla yogurt, almond milk, extra-pulp orange juice, smoked gouda cheese, and roasted garlic hummus. But the quirky retailer also maintains pricing power by selling things that are uniquely Trader Joe's. Try finding Ginger Cats cookies, quinoa and black bean tortilla chips, or mango coconut popcorn at any other store.

More than 80 percent of the store's brands are private label goods, sold exclusively by Trader Joe's. If asked, almost any customer can tick off a ready list of Trader Joe's favorites that they just can't live withouta list that quickly grows. People go into the store intending to buy a few favorites and quickly fill a cart. "I think consumers look at it and think, 'I can go and get things that I can't get elsewhere,'" says one food industry analyst. "They just seem to turn their customers on."

Low on Prices

A special store atmosphere, exclusive gourmet products, helpful and attentive associatesthis all sounds like a recipe for high prices. Not so at Trader Joe's. Whereas upscale competitors such as Whole Foods Market charge upscale prices to match their wares ("Whole Foods, Whole Paycheck"), Trader Joe's amazes customers with its relatively frugal prices. The prices aren't all that low in absolute terms, but they're a real bargain compared with what you'd pay for the same quality and coolness elsewhere. "At Trader Joe's, we're as much about value as we are about great food," says the company. "So you can afford to be adventurous without breaking the bank."

All that low-price talk along with consumers' perceptions is valid. A recent report from Deutsche Bank compared prices at Trader Joe's with those at Whole Foods for a basket of 77 productsa mix of perishable items, private-label products, and non-food items. Trader Joe's was 21 percent cheaper than Whole Foods and had the lowest price on 78 percent of the items. Even when comparing private-label brands, Trader Joe's was 15 percent cheaper. What's more, Trader Joe's price advantage has been increasing, a point that is particularly telling given that Whole Foods, now an Amazon company, has focused strategically on lowering its prices over the past few years.

How does Trader Joe's keep its gourmet prices so low? By maintaining a sound strategy based on price and adjusting the nonprice elements of the marketing mix accordingly. For starters, Trader Joe's has lean operations and a near-fanatical focus on saving money. To keep costs down, Trader Joe's typically locates its stores in low-rent, out-of-the-way locations, such as suburban strip malls. Notorious for small parking lots that are always packed, Trader Joe's points out that spacious parking lots require more real estate and that costs money. Its small stores with small back rooms and limited product assortment result in reduced facilities and inventory costs. Trader Joe's saves money by eliminating large produce sections and expensive on-site bakery, butcher, deli, and seafood shops. And for its private label brands, Trader Joe's buys directly from suppliers and negotiates hard on price.

Finally, the frugal retailer saves money by spending almost nothing on advertising. Also, it offers no coupons, discount cards, or special promotions of any kind. Trader Joe's unique combination of quirky products and low prices produces so much word-of-mouth promotion that the company doesn't really need to advertise. The closest thing to an official promotion is the company'sThe Fearless Flyerwebsite page and a newsletter mailed out monthly to people who opt in.

In the absence of traditional advertising, Trader Joe's most potent promotional weapon is its army of faithful followers. If you doubt the importance and impact of fanatical Trader Joe's fans, just check out the numerous fan sites (such as traderjoesfan.com, whatsgoodattraderjoes.com, clubtraderjoes.com, livingtraderjoes.com, and cooktj.com) where the faithful unite to discuss new products and stores, trade recipes, and swap their favorite Trader Joe's stories.

Something Extra

Although the simple calculation of benefits to prices equates to strong value, there's something bigger that plays in Trader Joe's favor. Beyond all the wonderful and unique products, friendly staff, quirky store design, the combination of all these things produces synergy. It adds up to an atmosphere and kind of trust that eludes most companies. One industry observer who is not a fan of grocery shopping sums it up this way:

Walking into a Trader Joe's, my demeanor is noticeably different than when I'm shopping anywhere else. Somehow I don't mind going there. At timesand it's still hard for me to believe I'd say this about shoppingI actually look forward to it. Trader Joe's does something pleasant for my brain, as it does for millions of others. There's more transparency in my dealings with TJ's than most other places. Authenticity is something you can feelit's crucial to thebuzz. Trader Joe's proves that even when you get the other elements of the experience right, people still matter most.

Finding the right price-value formula has made Trader Joe's one of the nation's fastest-growing and most popular food stores. Its 504 stores in 48 states (plus the District of Columbia) now reap annual sales of at least $13 billion by one analyst's estimate (the private company is tight-lipped about its financial results), an amount that has quadrupled in the past decade. Trader Joe's stores pull in an amazing $1,750 per square foot, more than twice the supermarket industry average. InConsumer Reports's "Best Supermarket Chain" review, Trader Joe's has occupied one of the top three spots every year for the past fiveyears.

It's all about value and pricewhat you get for what you pay. Just ask Trader Joe's regular Chrissi Wright, found early one morning browsing her local Trader Joe's in Bend, Oregon.

Chrissi expects she'll leave Trader Joe's with eight bottles of the popular Charles Shaw wine priced at $2.99 each tucked under her arms. "I love Trader Joe's because they let me eat like a yuppie without taking all my money," says Wright. "Their products are gourmet, often environmentally conscientious and beautiful ... and, of course, there's Two-Buck Chuckpossibly the greatest innovation of our time."

1Based on the information in the case, would you say that Trader Joe's practice customer-value pricing, or cost-based pricing?

2.Does Trader Joe's employ good-value pricing or value-added pricing?

3. What impact does the heavy use of house brands have on the pricing strategy for Trader Joe's?What does the Trader Joe's brand mean?

4.Complete a SWOT analysis for Trader Joe's.What are the largest areas of concern, and how would you address them?