Trader Joe's Case Analysis

Topics: Grocery store, Strategic management, Price elasticity of demand Pages: 14 (2031 words) Published: April 27, 2014
UGBA 115:
Competitive Strategy
Trader Joe’s Midterm Case Analysis

Jean Carlo Hoyos

Trader Joe’s Analysis

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The Industry
The grocery industry in the United States is currently an attractive industry (a.k.a. profitable). This attractiveness derives from the relative low threat of new entrants, low supplier and buyer powers, and low threat of substitutes. The main factors driving these results are the low concentration of suppliers and buyers, the significant barriers to entry due to high up-front investment costs (for infrastructure and distribution channels) and scale economies, low availability of substitutes 1, and the threat of retaliation from incumbents (by lowering price, for example). However, it is important to note that there is a heated rivalry among incumbents due to low seller concentration, high price sensitivity from consumers, dynamic price changes and strong exit barriers. Refer to Exhibit 1 for a detailed observation of the forces influencing the industry’s attractiveness.

The industry offers opportunities and poses threats in several areas. In the economic environment, the rising oil prices increases costs in the supply chain and/or distribution channels. In contrast, the several free-trade agreements with different countries open the doors for a variety of products from abroad at potentially lower prices or higher quality. Also, the proliferation of high end and low end niches (in detriment of traditional supermarkets) is paving the way for small-footprint stores that cater to specific customers.

Technology is playing a major role in the grocery industry with the consolidation of social media (Facebook, Instagram, YouTube, Vimeo, etc.) that allow instant communication between firms and customers (and among customers, too) and also enables customers to access information,

The grocery industry is implied to take place on physical stores. Therefore, the substitute taken for this analysis is online grocery shopping.

1

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such as prices, in real time and compare them. Self-checkouts are also an important low-cost driver.
In the sociocultural environment, a more educated population is increasingly becoming more health-conscious which is raising the demand for “organic” food. This increase in demand for organic products caused the USDA to start regulating every product before the label “organic” can be stamped on it. Refer to Exhibit 2 for a more the full PEST analysis. Within the industry, firms are grouped by their emphasis on service quality compared to their product variety or SKUs (Exhibit 4). The mobility barriers within these groups are high in the big-footprint group (high SKUs / low to medium service quality) and low within the smallfootprint group (low SKUs / high service quality). For example, there is extensive evidence of big retail stores entering the small-footprint market, such a Walmart with its profitable WalmartExpress stores, but there is no evidence of small-footprint stores expanding into the big-footprint arena.

Trader Joe’s
Trader Joe’s strategy is to provide unique products for highly educated customers at reasonable prices and excellent customer service. The efficient and effective way in which TJ has achieved this strategy has turned it into its competitive advantage. This competitive advantage has its roots on TJ’s core competency of Culture and Brand Management (Exhibit 7) which is the result of the combined effects of Infrastructure, Human Resources, Inbound Logistics and Service from the value chain (Exhibit 6).

However, TJ is lacking in important areas of the value chain such as Marketing and Operations. TJ’s resistance to join social media and its minimal online presence increases the probability to

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lose customer awareness in the midst of fierce competition (for example, Wal-Mart Express stores, Target grocery expansion and CVS / Walgreens entry into the grocery market)....
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