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Trader Joe’s: A Case Analysis of Trader Joe's Competitive Strategy.
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An Undergraduate Honors Thesis Submitted in Partial fulfillment of University Honors Program Requirements University of Nebraska-Lincoln By Holden Adams, B.A. Accounting & Finance College of Business December 8, 2020 Faculty Mentor: Marijane England, Ph.D., Management
Abstract Trader Joe’s has been wildly successful since the store was first founded largely due to their ability to distinguish themselves from their competitors. Found across the United States, Trader Joe’s offers its consumers a unique range of private-label products to their target audience. This case analysis delves into Trader Joe’s competitive strategy and how they plan to sustain their competitive edge in the years to come. Many factors play a role in the success of Trader Joe’s over the past years. Internally, they carry highly sought after products and have a loyal consumer base. They have found a foothold in the young and educated population. Generally, their products are highly unique and often can’t be found anywhere else. This proves very attractive to their customer base that often likes new and exciting food products. Externally, a lot of forces are in constant motion that affects the strategic positioning and decision making of Trader Joe’s. This analysis takes a look at 5 key forces within the supermarket industry through the use of Porter’s 5 Forces Analysis. Through this, we are able to see how the major forces of buyers, suppliers, competitors, threats of new entrants, and substitute products affect the supermarket industry. Alongside this, the analysis also uses a PESTEL Analysis to analyze a variety of external forces. Through this, one can see the forces and threats on Trader Joe’s. Knowing the supermarket environment is key to understanding the current strategy of Trader Joe’s takes on within it. When it comes to remaining competitive, Trader Joe’s falls heavily on their specialty private-label products within their compact stores. Beyond their current strategy, there are many opportunities Trader Joe’s could decide to seize. Trader Joes must find a way to remain sustainable and competitive in future years. Whether this be branching outside the United States or establishing a marketing team. If implemented, these changes would have beneficial effects on the company’s financial statements. Keywords: Trader Joe’s, Competitive Advantage, Competitive Strategy
of new entrants, the ability of suppliers to affect profitability, the effect of customers on profitability, and the availability of substitutes from another industry. In the supermarket industry, rivalry is intense. The supermarket industry is competitive with a lot of high-profile competitors in the industry. However, even smaller companies are able to compete in this industry. One of the things that allow smaller companies to compete is the low switching cost and lack of product differentiation. This allows them to sell the same products at very similar costs. Through all of this, intensity among competitors is a huge threat, and one of the driving forces in this industry. Additionally, to the supermarket industry, there is a moderate initial capital investment required for new entrants. This is avoidable for established retailing stores as most of the capital expenditures are due to buildings and property. It wouldn't be too difficult for companies that sell products or merchandise to incorporate a grocery segment. This is a similar strategy that Target took on. Another factor that plays into this force is the low switching costs. This remains a high threat as customers can easily switch from one store to another. This remains attractive to potential companies entering this industry. The low switching has to do with low product differentiation in the industry. Customers can find the same products at other supermarkets which makes price such a key factor when potential companies consider entering the industry. Overall, the threat of new entrants remains moderate in the supermarket industry. The next force to consider in the supermarket industry is the bargaining power of suppliers. Companies in the supermarket industry purchase from a lot of individual suppliers. This can be a strong threat. However, a supermarket can have their pick on the supplier of a single product. With any given product, there can be numerous suppliers which weakens the bargaining power of suppliers. This makes quality and price important to supermarkets and gives suppliers limited wiggle room in deciding these factors. Another factor that plays into the bargaining power of suppliers is the lack of forward integration. This can be a potential threat if a supplier creates a wide variety of products but typically this threat remains moderately low. Suppliers can usually achieve high levels of economies of scale of a single product or a few products and can sell them to supermarkets at a margin. Economies of scale would quickly disappear if they offered the variety of products a supermarket does. Additionally, suppliers lack the resources and capabilities to offer such a vast variety of products that would be comparable to a supermarket. Overall, this threat remains relatively low in the supermarket industry. The fourth force to consider is the bargaining power of buyers. The buyer’s in this industry carry a very high level of bargaining power. As discussed before, the low-switching cost is an advantage to the consumers and a threat to the supermarket industry. In most cases, buyers have access to pricing across multiple stores all at their fingertips. With the rise of the internet in the 21st century, buyers have access to information and can make optimal decisions for their budget in a few seconds. With such little product differentiation between stores, price is everything in this industry. If stores aren’t able to lower their prices, they simply switch to a store that will. This gives buyers the ability to drive down prices and cut into supermarkets’
margins. Buyers also heavily influence the management of what is carried in their stores. Due to this, the threat of buyer’s bargaining power is a very strong force in the supermarket industry. The fourth force under review is the threat of substitute products. This threat remains relatively high as many places can supply food products. For one, you can obtain food products at any gas station, food truck, restaurant, or any place selling food. All these are readily available to consumers and can take business away from the supermarket industry. However, supermarkets aren’t totally hurt by this as some of these substitutes are purchased directly from a supermarket. Another factor that feeds into the threat of substitute products is the low switching cost discussed in other forces. Accessing these substitute food products outside the supermarket industry is both convenient and inexpensive. Lastly, there is the threat of substitution within the supermarket industry. Supermarkets offer a wide array of products, but not always exactly the same. Certain ingredients or different variations of a product can fulfill the same need for a customer. This threat remains high within the supermarket industry due to these reasons. The fifth and last force this analysis will consider is the intensity of rivalry among competitors in an industry. The supermarket industry is super competitive with a lot of high profile competitors in the industry. However, even smaller companies are able to compete in this industry. One of the things that allow smaller companies to compete is the low switching cost and lack of product differentiation. This allows them to sell the same products at very similar costs. Through all of this, intensity among competitors is a huge threat, and one of the driving forces in this industry. PESTEL Analysis A PESTEL analysis is a framework used to analyze the key external factors of an industry. This analysis looks at the political environment, economic landscape, sociocultural forces, technological developments, natural environment, and legal legislation. Now let's take a look at the supermarket industry through a PESTEL analysis. The first factor we will look at is the political environment. Probably the biggest factor is the taxation for business. Increasing or decreasing tax rates for corporations can encourage or deter decisions of management. Taxation changes can also come in the form of tax credits or sin taxes on certain products. Another part of the political environment is labor laws. Specifically, increasing or decreasing wages minimums or benefits can be heavily politically motivated and greatly affect a company's cost of operation. Lastly, environmental laws play a factor in the political landscape of a company. Depending on the political landscape of the nation, these can bring about changes that affect the physical environment. For example, changes in carbon requirements can increase costs to a company and deter certain efforts of management. The second factor to consider is the economic landscape in the supermarket industry. For one, rising labor costs play an important factor in industry costs. This is often tied to the steady rise in inflation that happens across all industries. Other factors include high unemployment which can result in low disposable income or vice versa if unemployment is low. Fortunately, in the supermarket industry, food is a necessity and doesn’t change too much in economic
to do with their approach to not invest greatly in technology. The other part is to keep overhead costs down from not having a marketing or social media team. Focal Resources and Capabilities One capability Trader Joe’s uses to distinguish themselves from the rest is offering a variety of private-label products that are unique and exciting. They build upon this by offering these specialty products at affordable prices through direct channels with suppliers. Their use of secrecy enables them to protect who their suppliers are from their competitors. It also allows its suppliers to provide Trader Joe’s with lower-cost versions of products. This allows producers higher profit margins compared to competitors. Trader Joe’s secrecy is reinforced as they are a privately-held company. Being privately held allows Trader Joe’s to not disclose financial statements to competitors. SWOT Analysis Now let’s a look at Trader Joe’s through the use of a SWOT analysis. This analysis will first cover the internal strengths of Trader Joe’s. The first internal strength that comes to mind is its unique private-label products. This serves as a strength because it helps them distinguish themselves from other supermarkets by having food products that are difficult to find. Unique products mixed with the secrecy about suppliers allow Trader Joe’s to make a higher profit on low-cost products. The second biggest strength of Trader Joe’s is their customer loyalty. Trader Joe’s has a loyal fan-base that continually returns to their stores week after week. Most of their new customers find Trader Joe’s through word of mouth of current satisfied customers. This has proved to be one of the most valuable assets to Trader Joe’s. This analysis will now cover the internal weaknesses of Trader Joe’s. One of the weaknesses of Trader Joe’s is its lack of marketing. They have very limited ads and can’t be found on any social media platform. This is an internal function that Trader Joe’s actively opts out of. Another weakness is the limited products they offer. Customers may be unable to find everything on their grocery list because of Trader Joe’s small variety of products in their stores. This can be undesirable to customers who want a single store to provide them with everything on their grocery list. The biggest opportunity for Trader Joe’s is to expand further nationally or internationally. Nationally, most of their stores are located in California but have the opportunities to create a strong presence in other states as well. This could help them build market share and give them access to distribution channels between stores nationwide. As far as internationally, Trader Joe’s has no presence. They could increase market share if they can expand across the border or in other similar countries overseas. A great opportunity would be in Canada because they could still access supply channels in the United States. Additionally, Canada has a very similar culture as the United States meaning there would be very little need for adaptation. Lastly, we will take a look at external threats to Trader Joe’s. The threats we will look at have been identified in our Porter’s Five Forces analysis so this analysis will quickly review the
major threats. The biggest threat to Trader Joe’s is market share being eaten up. This can happen through new companies entering the industry or current supermarkets adopting similar strategies as Trader Joe’s. The supermarket industry competition is intense with powerful competitors controlling most of the market share. Even so, smaller companies have proven to compete in this industry which drives market share away from Traders Joe’s. Lastly, substitute products are readily available and take away potential market share from the supermarket industry. Focal Competitive Advantage Their focal competitive advantage is the unique private-label products they provide. This provides them with two key advantages. The first advantage is it enables them to distinguish themselves from other competitors. Unique products are attractive to consumers because they are unable to find these products elsewhere. The second advantage of unique private-label products is the ability to charge high prices for them. This is because customers are willing to pay more for an item they perceive as unique. Private-label products have enabled Trader Joe’s to have great success over the years and continue to give them a competitive edge for the years to come. Recommendation The biggest opportunity I see for Trader Joe’s to address issues of growth in the future would be to be more active in digital marketing. This would enable them to grow faster by reaching a large audience of customers. This, mixed with their exposure with word of mouth would help the company grow at exponential rates. This would also help current customers feel more connected through interaction on social media platforms and other digital marketing. Trader Joe's audience is very active on social media and desires interaction with the company. It would also enable them to be knowledgeable about new products they introduce weekly. This would also increase sales of current customers who become more knowledgeable about the products they carry. Through this, they can build market share through new customers and increase retention with current customers. Implementation of Recommendation The way I would implement my recommendation would be to create a digital marketing team to promote Trader Joe’s. The digital marketing team would be split between an advertising team and social media team. The goal of the advertising team would be to promote Trader Joe’s products through online advertisements. The goal of this would be to showcase current products as well as introduce new products. This would keep current customers informed on changes in products in stores as well as create influence and exposure to potential new customers. Potential new customers would gain an understanding of Trader Joe’s as a whole and the products they carry in the store. On the other side of things, the social media team would be able to serve as
Appendix
Works Cited Ager, D., Roberto, M., (2014). Trader Joe’s. Boston: Harvard Business Publishing. CPA Practice Advisors. (2017, September 18). More than Half of Grocery Sales Now Influenced by Digital Marketing. Retrieved November 06, 2020, from https://www.cpapracticeadvisor.com/home/news/12368519/more-than-half-of-grocery- sales-now-influenced-by-digital-marketing
