Trader Joe's Recipe for Success

By limiting its stock to specialty products at low prices, Trader Joe's sells twice as much per square foot than other supermarkets

by Christopher Palmeri

It began with plain, "Greek style" yogurt, which has a somewhat sharper taste than the traditional American kind. Then came the nonfat version and one mixed with honey. Soon, a cornucopia of new flavors appeared. Strawberry, fig, and the truly yummy apricot/mango blend. The cost: $1.29 for an 8 oz. container that's a little larger than a typical yogurt serving. That's how it is at Trader Joe's, where a trip to the supermarket is sort of a culinary adventure, a chance to discover something new, like apricot/mango Greek-style yogurt.

There are lots of ways to demonstrate customer service. Trader Joe's excels at one of the basics: delivering unique products at reasonable prices. The chain, which has 280 stores in 23 states, has from its earliest days tried to bring unusual goods to a clientele ranging from gourmands to starving artists. The strategy helped Trader Joe's rack up an impressive $6.5 billion in sales last year, according to the trade publication Supermarket News. "I do as much shopping as possible at Trader Joe's because of the prices," says Elizabeth Payne, an actress in Los Angeles.

Finding a Niche

Sandy Skrovan, who heads food store research at the consulting firm TNS Retail Forward, figures Trader Joe's generates sales in the neighborhood of $1,300 per square foot, double the supermarket industry average. Skrovan knows exactly how. She regularly shops for what she says is the widest variety of gluten-free foods at two company locations near her home in Columbus, Ohio. "When you think Trader Joe's you think of innovative products," she says. "That's what drives their model—return patronage and quality products at a fair price."

The strategy was born of desperation. In 1967 Joseph Coulombe owned a small chain of convenience stores in the Los Angeles area that were struggling to compete against a fast-growing newcomer named 7-Eleven. That's when the Stanford University business school grad read a surprising fact—that alcohol consumption rose along with education levels. Coulombe stocked his stores with what he says was the largest assortment of California wines at the time—17 brands. Then he watched them fly off the shelves, as a new demographic now known as yuppies discovered his stores.

As the 1970s came, Coulombe was among the first to turn Southern California shoppers on to treats such as brie, wild rice, Dijon mustard, and Vermont maple syrup. Coulombe modeled his approach on that of Stew Leonard's, a Connecticut food merchant famous for carrying a limited assortment of quality products, and to that of Brooks Brothers, which sells only its own label suits. "We adopted a policy of not carrying anything we could not be outstanding in, in terms of price," Coulombe told BusinessWeek in a telephone interview. "It took us about five years because we had to create a whole new chain of logistics. We especially encouraged small businesses as vendors."

Private-Label Products

Today Trader Joe's carries about 2,000 products, vs. 30,000 at a typical supermarket. About 80% of Trader Joe's goods are private label, compared with 16% for the rest of the supermarket industry. The chain doesn't carry familiar mass-market brands such as Coca-Cola, Budweiser, or Pampers. You'll find just one kind of laundry detergent, the "low-sudsing," biodegradable house brand. But there are 10 different kinds of hummus, starting at just $1.99.

Testing for many new products is done at company headquarters in the Los Angeles suburb of Monrovia, Calif. Staffers in the test kitchen ring a bell when new products are available so an employee tasting panel can sample.