Those of us who live in the Greater Eckington/NOMA/Trinidad neighborhoods of Washington can finally stop talking about it. Trader Joe’s has arrived at Union Market. I went there this morning to check out the neighborhood’s new crown jewel, which made me think about what it is that we — and by “we” I mean “people in Trader Joe’s educated, relatively urban demographic” — love about the place.
And what’s not to love? In many of the categories that Trader Joe’s serves — notably its frozen foods — the store reliably has the highest-quality options. If you are already a customer, I probably do not have to sing the praises of its frozen flatbreads, ice creams and mac-and-cheese-ball appetizers. And if you are not already a customer — well, I will not taunt you with what you are missing.
Then there’s the customer service: clerks who actually know all the products and can tell you not only where they are in the store, but also how to cook them and what they pair well with. Checkout lines that move like the wind. Employees who are inevitably friendly and cheerful (not to mention pretty well compensated, in case your conscience was bothering you).
Let’s face it, TJ’s is pretty darn lovable. No wonder my neighbors have been so excited. But what they may not realize is that much of what they love about Trader Joe’s is not a product, or even the subtle hippie aesthetic, but a business model.
That business model can be summed up in two things: “private label” and “low SKUs.” Private label is self-explanatory; Trader Joe’s house-brands most of its products, which means they’re cheaper (no need to pay for all those national advertising campaigns).
But maybe you already realized that. It’s the low SKUs that really offer a hidden benefit to millions of unwary shoppers. SKU is an industry acronym for a “stock-keeping unit,” a.k.a. “one product.” The average grocer carries nearly 50,000 SKUs. Trader Joe’s, by contrast, carries only about 4,000. That’s an immense difference — though you’ll only realize how immense when you think through the implications.
Real estate, for instance. The new Trader Joe’s near my house is, by the standards of a Trader Joe’s, quite roomy, with wide aisles and lovely high ceilings. But compared to the local grocery stores, it’s still compact. In a dense, urban area like Washington, that’s a big savings on rent — which can be passed on to you in lower prices.
The advantages hardly stop there. When you only have a few SKUs, all of which have to earn their place on the shelf by selling briskly, you end up with less spoilage than a normal grocery store. Given the razor-thin margins typical of the industry, spoilage can be the difference between turning a profit and running into the red. Minimizing your SKUs gives you even more room to cut the prices on the products you do sell.
Then there’s that famous Trader Joe’s customer service. Now, by all accounts, the company has a genuinely admirable corporate culture, with well-paid staff who love working there. Happy employees give better service. So a doff of the sailor’s cap to Trader Joe’s for being a good pace to work. But we should also recognize that its business model makes it profitable to invest a lot of money in staff.
The thing about having 50,000 SKUs (or 100,000, as is typical of a Walmart) is that no employee can be familiar with more than a small fraction of them. It is not possible, in such a place, to deliver the kind of service that Trader Joe’s does. For example, the new outlet’s store captain, Rebekah Eagle, told me that the store regularly holds employee tastings to familiarize the staff with what they’re selling. A great idea, with a limited stock selection; not feasible in a conventional grocery. And since it is actually impossible for front-line workers at conventional stores to deliver Trader Joe’s-level service, it doesn’t necessarily make business sense to invest in the kind of training and retention policies that Trader Joe’s does.
The private-label branding allows Trader Joe’s to attract loyal customers with cheap prices. And the low number of SKUs allows it to generate extremely high revenue per square foot, enabling it to pay the rents even in expensively dense urban areas and to lower prices even further. It’s a pretty neat trick, if you can manage it.
All of this might naturally raise a question in your mind: Why can’t anyone else seem to manage it? The answer lies in what former Wired editor Chris Anderson dubbed “the long tail.”
Trader Joe’s customers display a loyalty bordering on zealotry. And yet, I don’t know anyone who does all their shopping there. The selection is simply too limited. If you’re a Trader Joe’s customer, there’s a good chance you supplement your trips with at least the occasional one to a conventional grocery store.
Which brings us to the long tail. The insight that Anderson had was that in shopping, you have high-frequency items with wide appeal and high sales — in grocery terms, that would be something like milk or eggs. But you also have a “long tail” of items with much lower demand — say, cream of tartar for whipping up a meringue.
Trader Joe’s eschews the long tail. And that’s really profitable, because selling large numbers of infrequently purchased items is extremely expensive — not just because of the real estate costs, and the inferior customer service you can offer, but also because items that aren’t purchased that frequently tend to spoil more often, adding more expense.
But cutting of the tail only works if there’s someone else around to supply it. Anderson pointed out that the Internet is really good at this — Amazon’s entire business model, in a sense, started with the long tail. If you have enough scale, it doesn’t cost you too much to serve that tail, because while it would be really expensive for every bookstore in the country to keep three copies of an infrequently purchased book, Amazon can store, say, 20, and keep up with national demand.
But in local bricks and mortar, it’s expensive. Which is why we love Trader Joe’s so much. But also why it will never quite secure the undivided loyalty of our wallets.