TJ'S Mystique: Cheap Thrills

Founded in the late 1960s, Trader Joe's to this day has held true to the vision of its founder, Joe Coulombe: "offer shoppers a little adventure by stocking items they couldn't find elsewhere at prices that wouldn't empty their wallets."

RIGHT: Trader Jacques French liquid soap with orange blossom honey is imported from France, and according to the label, is made with coconut oil, olive oil, natural vegetable glycerine, tea cocoate, and aloe leaf extract. The label also says the soap contains "no animal products and no animal testing."

The legendary French designer Coco Chanel, who dominated the international high-fashion scene for six decades, once said: "In order to be irreplaceable one must always be different."

In a hyper-competitive world, differentiation has become the Holy Grail for retailers. Many have their eyes on the prize. But few have attained it and fewer still have been as successful as Trader Joe's, the Monrovia, CA-based chain which has emerged as one of the most successful niche marketers in the country and the envy of every supermarket executive from Boise to Berlin.

Considering the state of mainstream retailing in the U.S., Trader Joe's is something of an anachronism-a throwback to simpler times when small neighborhood supermarkets were the only game in town.

Conventional wisdom has it that Trader Joe's shouldn't even exist in a world where bigger is perceived to be better and the number of items stuffed on the shelves is often a measure of a chain's merchandising prowess. Consider the following:

Counterculture Cachet

Trader Joe's carries no national brands (at least not those that have gargantuan marketing and promotional budgets).

Private label accounts for 80-85% of non-alcoholic products.

Aside from a seasonal brochure--The Fearless Flyer--the company doesn't do mass market advertising, preferring word-of-mouth among customers.

Stores only carry 2,000-2,500 items, one tenth the selection carried by conventional stores.

Stores average 8,000-9,000 square feet--one-third the size of even the smallest conventional supermarkets.

The majority of stores have been located in small, relatively inconvenient strip malls where parking is a major problem.

For the average chain, these factors alone would be enough to insure monumental failure.

But Trader Joe's is not typical. In fact, these are just the things that attract consumers and the reasons the company has flourished since its inception four decades ago and why it remains independent from the international retail empire developed by its parent, Germany-based Aldi.

While company officials on both sides of the Atlantic have consistently declined interviews, industry observers estimate that Trader Joe's sales are approaching $2.6 billion, or about $12 million per store.

This is likely to increase as TJ's unique model penetrates more densely populated urban markets like Chicago and New York.

More important, the chain's 220-plus stores in 19 states--most located on either the East or West Coast--rack up sales per square foot of $1,200-$1,300, which is about twice the industry average.

TJ's Creator

This is a far cry from its rather humble beginnings in the 1960s when entrepreneur Joe Coulombe purchased three Pronto convenience stores around Pasadena. From the beginning, it was his intention to do something different by stocking wine and gourmet foods--most of them closeouts--at reasonable prices.

His efforts marked the beginning of the democratization of gourmet products by making them available to people who might have champagne tastes but a beer income.

The stores gathered a following. But in the late 1960s Coulombe was facing a new competitive threat when 7-Eleven began a rapid expansion into California from its Texas base. It was then that he decided the stores needed a new twist.

As legend has it, he was sitting on a beach contemplating the future of a new retail landscape when he came to the conclusion that people were usually more at ease and more receptive to new things when they were on vacation.

This was long before the term "retail anthropology" was coined. But Coulombe knew instinctively that everything depended on understanding consumers. As such, his vision for Trader Joe's was to offer shoppers a little adventure by stocking items they couldn't find elsewhere at prices that wouldn't empty their wallets.

It was then he decided on a tropical theme for the stores-right down to the loud print shirts on employees, fishing nets on the walls and a thatched roof bar in the back for sampling that looks like something out of a 1960s "B" beach movie.

At the same time, Trader Joe's began its foray into exclusive private label lines which, with the exception of wine and a few other items, supplanted manufacturer closeouts as the main source of product.

All together, these are the elements that make a trip to Trader Joe's a unique and fun experience for consumers who often think of supermarket shopping as exciting as a trip to the dry cleaner or the dentist.

Recently, Trader Joe's has fancified the stores a bit--getting rid of the fish nets and other kitsch in favor of murals of local scenes and digital signage that still have the feel of the old time chalk boards and hand written signs.

Joe Coulombe: A Smart Trader

The founder of Trader Joe's, Joe Coulombe, is a 1954 business school graduate from Standford University.

As the company tells the story at its website:

Trader Joe's actually began in 1958 as a chain of convenience stores called Pronto Markets in the Los Angels area. In 1967, the founder Joe Coulombe, the original Trader Joe, wanted to expand the stores' offerings and enhance their image. He doubled the floor space and offered hard-to-find, boutique domestic and imported wines and gourmet food items at outstanding prices.

He decked out the stores with cedar plank walls and nautical décor and garbed the Captain (the store manager), the First Mate (the assistant manager) and the Crew Members in colorful Hawaiian shirts. "Trader Joe's" was born.

Joe's Travels

Although Coulombe sold TJ's in 1978 to Theo Albrecht, founder of Aldi North, he is still very active in the world of food and wine. In fact he has become a world-class wine connoisseur and operates the website: www. winejoe.com.

His website has links to Trader Joe's, Cost Plus World Market, and Chronicle Wine Cellar(a Pasadena, CA, wine shop) among others.

According to winejoe.com, Coulombe in early October was hiking the vineyards of Côte Rôtie and Condrieu, in the extreme north of the Rhone River in France. He expects to post a report on the site about his journey in December.

--Peter Berlinski

TJ's Customer Base

What hasn't changed are its customers. Over the years, the chain has gathered a rabidly loyal, almost cult-like customer base that has been described as ranging from out of work PhDs to an eclectic assortment of foodies, sugar freaks and health nuts.

But these are not the hardcore health food freaks that haunt the aisles of chains like Wild Oats.

They are middle-of-the-roaders. They read labels and like the idea of healthy, environmentally safe products. But they also like chocolate chip cookies, peanut butter filled pretzels and burritos.

The tie that binds them is a general disinterest in the usual national brand fare and a desire for a comfortable shopping experience--a return to a time when local retailing was dominated, literally, by the butcher, baker and candlestick maker.

This approach has become a strategic weapon in building customer loyalty and differentiating itself from potential competitors.

LEFT: TJ's organic food offerings include quinoa, cranberry orange bran muffins, and cinnamon twists.

Destination Store Brands

Simplicity, at least as shoppers perceive it, is one of Trader Joe's core competencies, along with a strategy that depends largely on branding the store through constant development of new private labels rather than line extensions.

Private labels and the ability to cut out the middleman and buy direct from suppliers around the world, has made the chain far more profitable than the supermarket industry at large on a dollar-for-dollar basis.

At any given time, Trader Joe's has 15 to 20 buyers scouring the globe for unique items like Morello cherries from Eastern Europe, Belgian chocolates, artichoke tortellini, blueberry juice and frozen Thai-style gyoza dumplings--all of them under names like Trader Ming, Trader Giotto, Trader Jacques, Trader Darwin or Trader Jose, depending on the origin of the cuisine.

Additionally, a huge following developed for the $2-a-bottle ($2.99 in some areas) Charles Shaw wines--affectionately known as "Two-Buck Chuck." This wine, consisting of four "flavors," emerged as one of the fastest-growing labels in history and was responsible for creating a furor in the staid California wine industry.

At its peak, sales were one million bottles a month, with product stacked on pallets near a store's entrance. In fact, it wasn't unusual to see people backing up their Chevy Suburbans to the loading dock and hauling away cases of Charles Shaw wines. The hysteria was such that when customers of the Emeryville, CA store got wind of a new shipment of Merlot, an entire trailer load reportedly sold out in half an hour.

Whatever the product, Trader Joe's does not view private labels as one monolithic category. Products fall into one of two categories--either premium or value--and then broken down into three distinct tiers:

In-and-out items, which only make a one-time appearance or are seasonal in nature.

Everyday products including pasta, sauces and other staples that are always in stock, but not necessarily in the same package or from the same manufacturer.

A limited selection of items--particularly wine, beer and candy--which are purchased under exclusive agreements with regional or local manufacturers and are considered semi-private labels.

Focusing on private labels has not only enabled Trader Joe's to differentiate itself, but also to cut considerable waste from the system--marketing, advertising and supply chain costs inherent in the national brand business. The result is the ability to hold down retail prices while boosting profit margins.

True Trading Partner

Meanwhile, suppliers have come to consider TJs an efficient and profitable customer that is driven by innovation rather than operational efficiency. Like Aldi, it doesn't demand slotting fees, promotional money, rebates or other discounts that put costs back on manufacturers. In return, suppliers have to hit specific retail prices set by the chain for individual items and strictly adhere to exact specifications--right down to the size of the noodles in an Oriental dish and the size of the package.

But once suppliers hit the mark and produce a unique product that can't easily be copied, Trader Joe's trusts suppliers and pretty much stays out of their way. Moreover, if suppliers are willing to guarantee price, the chain can guarantee volume by signing multi-year deals. However, this doesn't necessarily mean a bonanza for a single manufacturer.

A case in point is baked goods, where Trader Joe's prefers to have 40 bakeries supplying one item each than one bakery supplying all 40 items.

Overall, 20-25 items may be introduced weekly, insuring stores a steady flow of customers who are used to looking for something new.

However, like its German parent, Trader Joe's new product testing is a rigorous process which includes informal testing panels on the East and West Coast consisting of shoppers, employees and managers. During these sessions people are asked to sample Trader Joe's products as well as other brands.

Once they hit the shelves, items that don't perform or receive customer complaints are quickly removed to make room for others. The company's philosophy is that items that don't make the cut are not considered failures as much as learning experiences.

LEFT: TJ's nonfood products include lavendar dish soap, lavendar dryer bags, Trader Zen hand soap, TJ's facial tissue, Trader Darwin vitamins, and Trader Jacques massage bar.

Some observers question whether Trader Joe's will maintain the same philosophy as it continues to grow across the U.S. and becomes a more noticeable competitor to conventional supermarkets. The answer seems to be yes. As one industry observer put it: "This is a chain that has succeeded simply by being itself."

*Len Lewis is editorial director of Lewis Communications, Inc., and a contributing editor to several retail business publications in the U.S. and Europe. His new book, The Trader Joe's Adventure-Turning a Unique Approach to Business into a Retail and Cultural Phenomenon, is in bookstores across the country. Lewis has been a speaker and moderator at numerous industry events and can be reached at lenlewis@optonline.net, or via his website www.lenlewiscommunications.com.

Aldi Perfects Limited Assortment Format

In its own words: "Aldi is an international retailer specializing in a limited assortment of private label, high-quality products at the lowest possible prices. Our unique way of operating makes it almost impossible for competitors to match our combination of price and quality. This means Aldi can offer Incredible Value Every Day."

LEFT: Aldi USA expanded into premium private label in 2004 when it launched its Fit & Active healthy food line and Grandessa gourmet food line.

What we know today as the box store revolution in U.S. food retailing began in 1976, when German retailer Aldi South bought Benner Tea Company and set up headquarters in Batavia, IL, a small town located on the Fox River thirty miles due east of Chicago.

Aldi was a quiet company on a mission: bring consumers the lowest food prices possible on quality products. Their business model had been honed over some 20 years of successful development in Germany. What they bought with Benner Tea was entry into the world's largest retail market and the opportunity to stretch their legs in a market that was ripe for new concepts, particularly Aldi's new concept. Retail price inflation was rampant. The press was hyping "high prices" in their daily headlines. Consumers were literally sitting in the supermarket aisles in protest.

As a testament to Aldi's success, they have grown worldwide to over 7,000 stores. While over half are in Germany, there are almost 800 stores here in 26 states, primarily in the Midwest and eastward. They rack up almost $5 billion in the U.S. (according to BusinessWeek) and rank as the 10th largest food retailer in the world. The story gets even more amazing when you look deeper into what they are and what they offer.

Aldi's Business Model

Aldi's business model was developed to strictly support their mission to bring consumers the lowest prices on quality food. Consider the following as you think about an Aldi store:

Aldi stores average 15,000 to 18,000 square feet in size and pretty much resemble a box. If they buy into a second-use facility that is larger, a wall is put up, the rest either leased or even left vacant.

They all look the same...a "Spartan" box with as few fixtures as necessary to perform the function. Most product is displayed on floor pallets in cut-open boxes with a retail price sign overhead. There are only three to four aisles.

Three to five registers take care of the traffic and only relatively recently are equipped with scanners. In the past, because none of the items were price-marked, cashiers were required to memorize all the retails.

They all operate the same, too: no coupons, no preferred cards, no free grocery sacks (shopping bags cost 10 cents each), and there is a refundable 25-cent shopping cart charge. And for vendors: no slotting allowances, no promotions, no advertising contracts.

Most striking is their variety, or their lack of it, in terms of how food retailers typically think of variety...only 700 to 800 items. While most sub-categories are represented, there is only one item in one size...one item in one size of peas or spaghetti or apple juice. The average Aldi does less than $100,000 per week, but think of the buying power behind each of those 700 items, compared to the typical supermarket that may carry 40,000 items in 40,000 square feet and do $280,000 per week.

Most interesting is that 90% of the items offered are offered under a brand owned by Aldi, a private label. There are different brand names for each category, but all are owned by Aldi. Seeing a "national brand" almost seems like an anachronism.

Private Brands At Aldi

Most food retailers would consider that 2,500 private brand items among an assortment of 40,000 items carried in total would be good. Aldi has 600 to 700 private brand items inside an assortment of 700 to 800 items in total. Their private brand items carry many different brand names, none of them Aldi. To determine that they are, in fact, owned by Aldi you need to read the "distributed by" line on the reverse panel.

Most food retailers look at private brands as a part of their store's offering. Aldi is different. Aldi's private brands are true extensions or true supports of the overarching Aldi mission. They don't have to worry about multiple inventories, directly competitive retails. They not only have much more control of their destiny with regards to their brands, they use their brands to reinforce a single message to the consumer: quality product at the lowest price. Aldi has captured the concept of using private brands to build consumer equity.

Leverage

Product cost leverage is achieved with tremendous buying power concentrated on very few items. Rough math would lead one to conclude that their average private brand item yields retail sales of over $5 million per year. Concentrate that on negotiations with a single vendor per item and you have real clout.

They can sell their private brands at retails of from 30% to 50% savings compared to a standard supermarket because of leverage in operations as well.

Consider that the customer is strongly encouraged to be an efficient customer because they bag their own groceries, they don't bring in coupons to redeem, there is no arguing about sale items, they pay for the grocery sacks they use or they bring in their own sacks and they don't abscond with the grocery carts because they are paying the quarter to use them and then bring them back.

Also, consider the fact that their stores are anything but exciting: bare walls, stark product presentation, no variety of the nature a consumer is used to, no sampling, and no departmental service.

They also have relatively little shrink due to the product mix they offer: very little by way of perishables or service departments that can cause the most shrink. Supervision is slight as well: only a direct line supervisor, no departmental supervision, minimal-but focused-training.

This regimentation of format and diligent restraint on their operational practices allows Aldi to achieve yet other benefits of scale. Their site selection process is greatly simplified, as are their architectural and construction or remodeling costs. The use of less expensive fixturing gives them added flexibility in adapting to any site or building constraints that would otherwise cause internal "footprint" problems. This emphasis on simplicity has made Aldi very scalable as they move to other parts of the country.

All of this leverage translates into a shopping trip that concentrates on private brands at the lowest retail prices possible.

BELOW: Aldi's private brands for nonfood include Kwik n' Fresh, Clarissa, Shique, and RainFresh.

Product Quality

When Aldi first made its appearance in the U.S., retail competitors were shocked at the low retails and amused by the "homey" names and label designs on all the products. Their conclusion was that the products must be of lower quality and they tended to react accordingly.

The "homey" names and label designs, however, have served to reinforce the message, at least from the price perspective. They have a ring of familiarity without the baggage of recognition. When tested, the product is generally fine quality. Again, the power of leverage.

LEFT: Aldi's private brands for food include Cheese Club, Casa Mamita, Millville, Cambridge, Corntown, Southern Grove, and Chazoo.

So, who shops at Aldi?

LEFT: Aldi's private brands for food include Cheese Club, Casa Mamita, Millville, Cambridge, Corntown, Southern Grove, and Chazoo.

When Aldi first began opening stores, competing retailers generally misread the appeal. Without any brand recognition of either the store or the products they carried, initial reaction was muted.

But when they began to visit their new competition, they became understandably concerned--cars in the parking lots were not the "beaters" or older cars generally ascribed to those in lower income brackets. Customers in the aisles appeared to be from all walks of life.

Research demonstrated that customers were probably better defined by psychographics than by demographics. Sure, a large part of the customer base was those on a limited budget, as expected. What was unexpected was this customer's acceptance of private, unknown brands.

Those customers who live on a more limited budget are sometimes less prone to experimenting with private brands, choosing, instead, to buy the insurance of quality or performance of the national brands. But the retail prices were so low that the response seemed to be: "how can I afford not to at least try?"

The product itself needed to be tested, but the risk of testing was low enough to not be a hurdle. The more affluent customer, the ones who can afford to experiment, did also.

The psychographic profile of the Aldi customer is more inclusive, consisting of people who are attracted to real value. The customer appealed to with a value proposition has, today, many more choices to buy their food: larger grocery stores, convenience stores, super centers, warehouse stores, membership warehouse stores, drug stores with expanded food offerings, specialty food stores, and, of course, the limited assortment box store--the one that started it all

The fact that Aldi has such a limited assortment actually opens up opportunities for other food retailers. Since most Aldi customers perceive they must shop other food stores to complete their shopping trip needs, they can be compatible from a geographic perspective--perhaps even sharing the same parking lot. They are likely to be able to co-exist with other stores.

Aldi can exist in higher income neighborhoods as well as lower income ones. The key is to find the customers who truly are open to a value proposition.

Aldi Changes

Yes, Aldi changes, but ever so slowly and only when those changes will mean better value to their customers and more efficiency for Aldi. Abrupt changes, changes that catch the latest marketing wind, are inconsistent with Aldi's mission. But they do change.

Aldi has scanning. The prices of scanning equipment has come down and the amount of information available from scanning files allow Aldi to speed up their checkout process, ensure greater pricing accuracy and gain information that would help schedule their labor.

Aldi does advertise. Not too long ago, the only advertising Aldi did was to publish price lists in their stores. To find out what Aldi was offering and compare prices with other, more conventional retailers, a customer made the trip to Aldi. Today, Aldi inserts flyers into local papers with item and price. Aldi also distributes its ad flyers via the Internet and posts them on its website.

Aldi does carry national brands. Initially, Aldi carried private brands exclusively. Today, there is a variety of national brands (albeit very, very limited) that Aldi has contracted with to carry their products. Featured in their "flyers" are a number of non-food items as well . . . it could be tools, flashlights, even clothing.

Aldi does go upscale. Sticking with their "homey" brand names and label designs, Aldi now has lines of more "gourmet" items (like Grandessa entrees), recognizing the makeup of their customer and their customer's desire to get value on items other than the sheer basics.

Aldi continues to be a retailer to watch very closely.

ABOVE: Aldi USA introduced this year under its Grandessa label a new line of restaurant quality frozen dinners created exclusively for Aldi by master chef M.J. Brando. The 10-oz. dinners retail for an amazing $1.99 each. Grandessa is the brand name used by Aldi South of Germany on its line of gourmet foods.

For a close-up of Aldi of Germany, see aarticle in our International Report on page 160.

*Steven Rubow has over 40 years experience in retailing and private branding and was President/CEO of Topco Associates for eight of those years. He is currently associated with Leo J. Shapiro Associates, a Chicago-based market research firm (website: ljs.com) and is on the faculty at The University of Chicago.