University of Nebraska - Lincoln
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Honors Theses, University of Nebraska-Lincoln Honors Program
Spring 2021
Trader Joe's Case Study
Madisson Magee
University of Nebraska - Lincoln
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Trader Joe’s Case Study
An Undergraduate Honors Thesis
Submitted in Partial fulfillment of
University Honors Program Requirements
University of Nebraska-Lincoln
By
Madisson Magee
Accounting
The College of Business
December 10, 2020
Faculty Mentor:
Marijane England, Management Department
Abstract
My senior project is focused around analyzing Trader Joe’s business model and writing a case
study focusing on the management strategies of the company. I wanted to know what made
them so successful and recognizable as brand in the grocery store industry. My case study is
based off of a Harvard Business School published case. Not only did I want to understand their
success, but also what factors impact them and what issues they face in maintaining a
successful business model. To do this, I analyzed many aspects of their company, where they
stand against competitors and internal and external forces acting against them. After
researching more about the company and these factors I found the central problem the
company faces and made recommendation for the company to continue to be a well
recognized grocery store name, while not losing their charm. Although Trader Joe’s stands firm
on operating using their original business model, I believe they could find updating some of
their technologies and improving their marketing strategy would be beneficial to the grocery
chain.
Trader Joe’s Case Study
Background of Company
Trader Joe’s is a grocery store chain that got its start in 1967 in Southern California. They have a
smaller grocery store layout averaging between 10,000-15,00 square feet and they mainly sell
their own private label items. Trader Joe’s is aimed at the educated, sophisticated consumer
that is looking for a different grocery store experience. The store has a different business model
than most large name grocery stores in the United States and has a low-cost strategy. Their
focus is on building a loyal and specific clientele and treating their customers well.
Central Focus
The problem Trader Joe’s faces today is as they have expanded through the United States and
other grocery retailers have seen their successes many companies are trying to imitate their
strategy. Walmart has increasingly opened up neighborhood stores, as have other major
grocers that are threatening Trader Joe’s business. Additionally, with the store’s expansion
across the United States people fear the store may lose its original charm and wonders how the
company will maintain their success with their expansion. Therefore, Trader Joe’s central issue
in this case is how they can continue to set themselves apart from other grocery stores who are
trying to copy their strategy and keep up their original charm that gained them such a loyal
customer base.
Porters Five Forces
To begin with, the grocery industry faces the threat of new entrants. The industry has relatively
low economies of scale as they do not normally produce their own goods, they focus on
purchasing their goods from suppliers and putting them on the shelf. There is also a low
switching cost in the industry as a buyer could easily chose to purchase similar products at a
different store for a very low cost. Additionally, new entrants most likely could gain access to
distribution channels and raw materials for their stores. However, a new entrant would face a
challenge as current competitors have strong brand identification in the market. Overall, the
threat of new entrants in the grocery industry is high.
The bargaining power of buyers is high in the industry. The products in the grocery industry are
relatively standard, although there are variations, buyers can find similar products elsewhere
and switching costs are also low for buyers as most likely there are other stores in the industry
selling at a similar price. However, the buyers do not pose a threat for backwards integration in
the industry. The quality of the product is moderately important, as companies in the industry
have similar quality control procedures in, usually in place by governmental agencies.
Companies quality of product does somewhat vary, and some buyers are more sensitive to the
quality of product than others making this threat moderate. Additionally, the concentration of
buyers relative to suppliers is high.
When looking at the power of suppliers in the industry, the supplier’s products are very
important to the buyer’s business as a majority of grocery stores expenses come from
purchasing. The supplier groups in the industry do pose a threat for forwards integration as
they may solely produce for their own stores or brand. However, there are multiple supplier
companies the industry is able to purchase from, and buyers usually purchase from numerous
suppliers reducing their power. Overall, the supplier power in the industry is moderate.
The threat of substitute products in the industry is high and current trends are increasing this
threat. Consumers now have the choice to buy products from multiple different places such as
in store, from online grocers such as Amazon and from other places such as convenience stores
or farmers markets. Additionally, some consumers choose not to buy groceries or cook at all,
but get their food from drive throughs or delivery services such as Uber Eats. Those consumers
who are focused on meal prep or a healthier lifestyle can purchase their groceries from services
such as Hello Fresh who deliver ingredients for specific meals or Eat Fit Go who prepares
healthy meals for consumers who just have to heat the meal up. The grocery industry
compared its substitutes does not always have a lower price or rate of improvement and
consumers have many substitute options.
The Intensity of Rivalry among Competitors in the grocery industry is also high. All grocery
stores sell relatively similar food items, and there is a lack of high switching costs or
differentiation because they sell commodity products. There are many large grocery chains in
the United States all trying to grow their business and come up with strategies for customers to
choose their business over another. The grocery industry is very competitive when it comes to
price as just about all Americans buy groceries and are often looking for the best prices or store
experience. Additionally, competitors in the industry may see high growth when first opening,
but this usually does not last and the industry as a whole sees slow growth.
Overall, the grocery industry faces many threats when looking at the Porter’s Five Forces
analysis. They face relatively low profit potential overtime and are influenced by many factors
making it challenging for them to see large growth.
Pestel Analysis
While reviewing the pestel analysis I have determined technology, economic and social factors
are affecting the grocery industry. Technology has been affecting the way people choose to
shop for groceries. Many companies who sell groceries, such as Amazon, recently have been
adding the option for customers to shop for their groceries online and either have them
delivered or picked up without the customer having to enter the store and shop themselves.
Additionally, in stores, technological advancements have been made such as self-checkouts and
apps that tell customers where certain products are located in the store. Technology is
increasingly changing the way consumers shop for groceries as it is allowing them to pick their
preference if they would like to shop in the store or online or have contact with employees or
check out on their own. Trader Joe’s has opted not to advance their technology and has
suffered from long check-out lines as they do not have technologically advanced registers or
self check-out, which may harm them as some of their customers are requesting these options.
Additionally, social factors have impacted the grocery industry. More people have adopted a
health-conscious lifestyle which reflects on not only their grocery purchases, but where they
shop depending on which stores carry their preferred food selections. Trader Joe’s offers many
options for health-conscious consumers bringing more people into their store for these options.
Also, demographics, income distribution and lifestyle factors are affecting where certain
grocery stores are located and who their customers are. Trader Joe’s strategically places their
stores where they believe people with their target customer lifestyle live to attract more
consumers to their stores.
Finally, economic factors impact the industry as consumers income and the economy as a
whole impact where consumers shop and what goods they are consuming. In times of a falling
economy people are looking for the cheapest option for their groceries and this combined with
their income, impacts which stores they shop at. Trader Joe’s low cost strategy allows them to
gain more customers, especially in declining economic times like the pandemic where
consumers are looking for cheaper options.
Current Strategy
Trader Joe’s current strategy is to offer products to the sophisticated consumers, hire quality
employees and to maintain smaller stores carrying their private label brand at everyday low
prices. By using these strategies, Trader Joe’s has created a unique grocery store with a loyal
customer base. Trader Joe’s primarily sells private label goods and maintains secrecy on where
these goods come from making the product hard for competitors to imitate and keeps
customers coming back for their specific products. Their customers are often college students
or sophisticated consumers who are interested in the unique products and change in product
mix. Trader Joe’s strategy of providing everyday low-cost items, while not sending out coupons
or ads has proven successful as they continue to have a loyal customer base and make profits.
They also value their employee’s interaction with customers and pay their employees above
average for the grocery industry allowing them to keep strong human capital and employ
people who are passionate about coming to work every day. Overall, Trader Joe’s has a low-
cost niche market strategy.
Resources and Capabilities
One main resource Trader Joe’s has that distinguishes them from their competition is their
private label offerings. About 80% of the stores revenues come from private label items which
is well above other grocery store brands. Trader Joe’s maintains a high level of secrecy with its
suppliers which gives them an advantage as other companies cannot find where their products
come from and copy them. For example, it is rumored Trader Joe’s has had companies such as
Pepsi Co create private label chips for their stores. Additionally, their capability of constantly
changing the products they sell in the store sets them apart. Many grocery stores continue to
sell the same products for years, especially due to them selling well known food brands and
products. However, Trader Joe’s discontinues and adds new products frequently keeping
customers intrigued about what will come out next and wanting to try new things. These two
features allow them to keep customers coming back, as their customers have seen the quality
of their product and are wanting to see what items will be at the store next. Trader Joe’s has
very motivated employees as they are well educated and passionate at their job. The
enthusiasm of their employees creates a vibrant atmosphere and their knowledge adds
sophistication to the store. Finally, Trader Joe’s has a reputable name and an extremely loyal
fan base where many customers even make fan pages on social media for the store.
Competitive Advantage
Trader Joe’s has a competitive advantage over the grocery industry because of many unique
characteristics they deploy in their stores. Their grocery stores are much smaller and carry less
items than a traditional grocery store. Additionally, the set up does not compare to stores like
Walmart or Target with clean straight lines of product. Trader Joe’s uses a “chevron” pattern in
their aisles revealing the store’s contents to shoppers who may then see a product they did not
come to buy and want to purchase it. Stores are strategically placed in urban areas usually
around colleges, where they are able to strategically target their consumers. When buying
private label products for Trader Joe’s they purchase goods directly from manufacturers instead
of working with distributors or wholesalers allowing them to get a large quantity of product at a
low cost, which in turn allows them to sell at low cost to their consumers. Another way the
store maintains low cost products, is they work in complete secrecy with their vendors to get
private label goods at a lower cost than branded goods. Their everyday low-cost strategy allows
them to save money as they do not need to put out coupons or promotional deals. These
advantages allow them to be named in the top twelve US supermarkets, even though they sell
far less product than companies such as Wal-Mart.
Recommendations
I recommend Trader Joe’s continues with its slow expansion across the United States, while
making some updates to their marketing and technology. I believe they should continue their
slow expansion, as the slow growth will allow them to properly train their employees and keep
their charm, while still expanding and reaching more customers. Currently, Trader Joe’s does
not market on social media. I believe they should begin making social media accounts to not
only market to their existing customers but spread awareness about the unique features of
their store. Trader Joe’s aims to gain customers who are “intelligent, educated, inquisitive
individuals” and places their stores mainly around colleges. Many college or post graduate
students these days are on social media and use it to find new products or brands to purchase
from. By adding social media platforms Trader Joe’s would be able to better inform their target
market about their store and entice them to shop there. Additionally, Trader Joe’s is proud of
its loyal customer base and interacting with their customers every time they visit the store.
Many of their fans have made social media posts about them, and by having a social media
presence Trader Joe’s could interact with more with customers and show their appreciation
which would enhance their goal of interacting with customers.
My second recommendation for Trader Joe’s is to update some of their technology in stores.
Customers have been quoted saying they love the product and prices of the store but hate how
long it can take to check out as there is no self check-out or updated checkout lanes. By adding
self check-out and more advanced registers to the store, check out time would decrease,
satisfying customers wants and increasing their experience while at the store. Social media
marketing and updated technology are incorporated at most large retail stores who Trader
Joe’s is competing with and these changes will increase their competitive edge. Additionally,
these changes will not negatively affect the charm of the store as many customers believe
these additions would enhance their experience with Trader Joe’s. These additions would
simply enhance Trader Joe’s capabilities, meet customers unmet needs in the store and still
leave them with a unique store layout and product line further setting them apart from
competitors.
Strategy Implementation
Trader Joe’s could implement my recommendations in a few simple steps. First, they should
work on developing a social media team to start social media pages, make posts and interact
with consumers. The social media team could also gather information about customer ideas for
the store and demographics to better help them in other areas of business and best serve their
customers. Second, Trader Joe’s should invest in self check-out lanes and new register
technology. Because the stores are small in square feet, some regular check-out lanes could be
replaced with self check-out so space for product would not be reduced. Employees would
need to be trained on how to work the new registers at check out and how to fix technology
issues. Overall, I believe my recommendations would be relatively simple to implement and
once the social media team is in place and technology is purchased, these recommendations
would not take long to put in place.
Financial Implications
The financial implications of adding a social media team to the brand would be paying the
employees on these teams, and possibly investing in ads on social media. I believe Trader Joe’s
presence on these platforms would bring new customers into the store increasing revenues.
Adding technology in the stores would be a cost to the company as they would need to find a
supplier of technology that best suits the stores needs and have this technology installed.
Although this cost could be large as they would need to implement new technology in their 414
stores, I believe it would increase customer satisfaction and bring more customers into the
store. Self check-outs as shown in Figure 1, would also reduce the need for labor as one to two
less employees will need to be working because the self check-out will take over some
employee responsibilities. Self check-out registers usually cost around $20,000 per machine,
but because Trader Joe’s would be buying in bulk they could potentially receive a discount. The
self check-out and new register technology would also be able to be used for many years in
Trader Joe’s stores. Finally, slowly continuing to grow and open new stores in areas where
Trader Joe’s has a potential for a strong customer base would cost the company to build and
operate the store, but these costs would be offset by the revenue the store would bring in over
a few years. Currently, Trader Joe’s makes $2.05 billion per square foot of store compared to
larger companies such as Walmart who makes $.607 billion in grocery revenue per square foot
of selling area. This shows, Trader Joe’s should continue slowly opening stores as their revenue
per square foot is extremely high for the grocery industry.
Figure 1: Self Check-Out Cost vs. Savings
Self Check-Out Cost vs. Savings
$18,000,000.00
$16,000,000.00
$14,000,000.00
$12,000,000.00
$10,000,000.00
$8,000,000.00
$6,000,000.00
$4,000,000.00
$2,000,000.00
$-
1 Self Check 2 Self Check- 1 Less Part 2 Less Part
Out-Machine Out Machines Time Employee Time
Employees
Costs Savings
This figure is based on a cost of $20,000 per self check-out machine and based on Trader Joe’s
average hourly pay of $12 an hour for a part time worker working 20 hours per week
Citations:
Ager, David, and Michael Roberto. “Trader Joe's.” Harvard Business Publishing Education, 8
Apr. 2014,
hbsp.harvard.edu/download?url=%2Fcourses%2F768096%2Fitems%2F714419-
PDF-ENG%2Fcontent&metadata=e30%3D.
