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Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. Business model innovation, strategic leadership and smart economic policies are her professional passions. A former Madison, WI resident, Kay now resides in San Diego, CA. The views on her blog are not those of her employer, IBM.

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March 3rd, 2011

Trader Joe’s Business Model Wins in a World With Excessive Choices

"Less is more" companies will thrive in the decade ahead.

All too often the rationally best alternative comes with subtle trade-offs that reduce the emotional benefits of your purchase. Take the Accura I purchased owing to the high service costs I had experienced with my Audi. Within hours of driving out of the Accura dealership, I grieved the Audi’s zippier feel and realized that I had just paid a huge price premium for a Honda with fancy wrapping.

The emotional loss need not always be the case. Take Trader Joe’s, in a class by itself when it comes to grocery stores. Fortune magazine captures the Trader Joe’s experience perfectly in saying, “Trader Joe’s is not an ordinary grocery chain. It’s an offbeat, fun discovery zone that elevates its shelves with a winning combination of low-cost, yuppie-friendly staples (cage free eggs and organic blue agave sweetener) and exotic, affordable luxuries – Belgian butter waffle cookies or Thai lime-and-chili cashews ­that you simply can’t find anyplace else.” Business Week refers to Trader Joe’s as a place “where a trip to the supermarket is sort of a culinary adventure, a chance to discover something new, like apricot/mango Greek-style yogurt.”

Trader Joe’s has a really smart business model. Unlike other grocery chains, Trader Joe’s stocks fewer items – 4,000 compared to 50,000 SKUs in a typical grocery store.  And 80% of its items are private label, compared to 16% for a typical grocery store, according to Business Week. Like Target and Brooks Brothers, Trader Joe’s gets away with less choice because its blend of appearance, shopping experience, merchandise and informed store associates leads you to trust Trader’s Joe’s choices.

In other words, it’s OK that the store lacks five soup brands or twenty-nine taste variants, like my neighborhood Copps. I trust Trader Joe’s soup choices for a fast weeknight dinner party. As a result, according to Fortune, Trade Joe stores have double the revenue per square foot of Whole Foods. With more volume over any one item, Trader Joe’s can negotiate better prices than Whole Foods.  No wonder the latter is called “Whole Pay Check.”

The company was started by a Californian, which explains the Hawaiian shirts store associates wear and their funky but warm personalities. The concept emerged when the small convenience chain encountered rough competition from 7-Eleven stores.  Adding very affordable wine selections and quirky foods like humus that Californian yuppies were discovering and loving, the concept grew into today’s successful formula: great tasting food that you can’t find other places at affordable prices, with well-paid truly fun people helping you out. No wonder the stores draw volumes of repeat customers.  I for one have never been in Madison’s Trader’s Joe’s when it’s not busy.

Trader Joe’s was later sold to the family trust of the extended German family that owns European grocery giant Aldi Nord. About the revenue size of Whole Foods, Trader Joe’s is growing far slower than one would expect given it’s market place success. (344 stores in 25 states plus Washington, DC.) That’s smart leadership.  Boston Chicken, Krispy Cream Donuts, Starbucks and multiple other national food chains learned the hard way that a rapid rise sets in motion a rapid fall when growth is driven solely by geographic expansion without rapid same-store growth.

Trader Joe’s is, in my estimation, at the frontier of a trend that will shape consumer experience in the decades ahead ­ – solutions to too much choice. We live in an era in which there is too much of everything – from food to holidays to fabrics to clothing brands to books to everything but good paying jobs and collaborative politicians. Too much choice can even stop our purchasing. Companies that limit our choices with solutions that exceed our functional and emotional needs bring welcomed relief and brand loyalty. Their value promises will trump others in their competitive set.

How can you insert “less is more” into your business model?

5 comments to Trader Joe’s Business Model Wins in a World With Excessive Choices

  • I thoroughly agree with you that there is far too much choice today. We may be a consumer based society but there has to be an end to this somewhere. Somehow, some way, we have to find a new way and I for one, have absolutely no idea how to do it but I do know for sure, we can either do it willingly or…

    But it will, or is now in the process of, happening. One way could be to share the largess around the world in a much fairer way perhaps?

    But I do miss the taste of an apple. And a tomato and a grape…somehow they really don’t taste the same as they do off a real tree or bush or vine.

    Perhaps as you say, the Trader Joe model may be one that will suit us all?

  • Love Trader Joe’s. Need one down here in Bloomington. Whether your practicing innovation via subtraction or a policy of minimalist design I think the trick is to know what you can’t be without and then what will delight. It can make such a more pleasant shopping experience. Traditionally it seems that the ‘safe’ route is to add more – not make a pruning decision out of fear of disappointing a mysterious someone.
    Fred H Schlegel´s last [type] ..I’m One of Many Seeds- and Happy To Be…

  • I always tell my clients: to secure loyal customers you must give up business. It’s the law of opportunity cost. Love your message.

  • [...] Krispy Cream Donuts, Starbucks and multiple other national food chains learned the hard way that a rapid rise sets in motion a rapid fall when growth is driven solely by geographic expansion without rapid same-store growth,” says [...]

  • maggie

    Accura is spelled Acura

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