Imagine a chain of grocery stores with no branded items, no television advertising or social media strategy, no coupons, no loyalty program, narrow aisles, small parking lots, and dramatically less selection than the typical grocery store. Does this sound like a company destined for success?
Not only does such a grocery store chain exist, but they’re crushing the competition. Customers love this place; it’s also ranked among the 100 best American companies to work for. What’s this grocery store chain called? Trader Joe’s.
How do they do it? This is not an easy question to answer because Trader Joe’s is a fairly secretive company. So, we put on our Freakonomics goggles in an attempt to reverse engineer the secrets of Trader Joe’s. Which, it turned out, are incredibly freakonomical. In fact, if Freakonomics were a grocery store, it might be a Trader Joe’s, or at least try to be. So here’s the big question: if Trader Joe’s is really so good, should their philosophy be applied elsewhere? Should Trader Joe’s be running… America?
Trader Joe’s is notoriously press-shy. It’s also a privately held company, so: no earnings calls with investment analysts; no public proclamations of any sort, really, about how it does business. A number of people, however, have spent a lot of time thinking about Trader Joe’s, including a former advertising executive named Mark Gardiner who became obsessed with the chain and went to work at a local store. He learned enough about the company by working there that he wrote a book called Build a Brand Like Trader Joe’s.
What Gardiner learned is that just about everything Trader Joe’s does, outside of exchanging food for money, is unorthodox for a modern grocery store. Let’s start with one of the first things people notice about the stores: the employees. Yes, they are friendly, and helpful, and enthusiastic. But there’s also a lot of them! If you go in during a slow time, you can easily be outnumbered by employees, in their TJ’s T-shirts and Hawaiian prints. One reason is that rather than stocking shelves overnight, like most grocery stores, Trader Joe’s stocks them during business hours. Why? As Mark Gardiner learned when he went to work there, the priority is to maximize customer interaction.
“They would tell us, you’re going to be looking for customers who seem like they can’t find something that they want or just seem curious about something,” Gardiner says. “You are going to initiate conversations with these people and… we want you to be friendly, we want you to be chatty… And more than anything else, we want you to do what it takes to make customers feel appreciated and wanted.”
Trader Joe’s also pays all these friendly employees above the industry standard: as of 2013, full-time Trader Joe’s “crew members” made about $50,000 a year while “captains” made more than $100,000, also with better-than-average benefits. So here’s a company that employs a lot of people, and pays those people well. But it also sells its products at very low prices. According to a 2016 investigation comparing a basket of items at a bunch of different grocery stores, Trader Joe’s was easily the cheapest compared to Safeway, Target, and Whole Foods. It was 32% cheaper than Whole Foods. And yet the company’s stores take in the most revenue per square foot in the industry. A 2012 analysis estimated that Trader Joe’s sells just over $2,000 of groceries per square foot. Whole Foods? About $1,200. Walmart? $600.
How is this happening? One explanation is that Trader Joe’s doesn’t sell a lot of brand-name groceries. Roughly 80% of their products are private-label items, also known as store brands. When you’re selling something that you also manufacture, or at least source directly, you obviously stand to make more money than if you’re buying from a middleman.
That said, even store-branded products need to taste good. Judging from the chain’s success, they do. In fact, some Trader Joe’s-branded items may taste identical to brand-name foods. Why? Because, it appears, they are identical. An investigation by the food website Eater, using Freedom of Information Act requests, found that many Trader Joe’s items are, in fact, manufactured by the same companies that make the brand-name versions of products that you can buy in many other grocery stores, usually for significantly more money.
There’s nothing wrong with this, and it’s hardly unusual for brand-name manufacturers to run a side business selling to private labels. But most places that sell a lot of house brands are seen as down-market discounters, not up-market superstars, like Trader Joe’s.
So why is Trader Joe’s different? Let’s start with the products that Trader Joe’s sells. Here are some of their most popular items: spatchcocked lemon-rosemary chicken, carne asada autentica, kohlrabi salad blend, sea salt and turbinado sugar chocolate almonds, gochujang almonds, chicken tikka masala, and gluten-free cheese pizza with a cauliflower crust. What is it about these foods that inspire fanatical devotion, even among people that don’t live within thousands of miles of a Trader Joe’s?
Trader Joe’s reportedly puts a great deal of effort into scouting, sourcing, and producing food that their customers truly love; but they also pay a lot of attention to package design and descriptive salesmanship. Their marketing director is called “Director of Words & Phrases & Clauses.” They publish an old-fashioned newsprint bulletin, The Fearless Flyer, with in-depth descriptions of new products.
Another key component of Trader Joe’s success is that the company values frugality. They often set up shop in cheap parts of town, saving money on real estate. The real estate firm Zillow found that homes near Trader Joe’s stores “appreciate more quickly than homes in the city as a whole,” concluding that either Trader Joe’s is really good at picking areas that are on the rise or that they are, in part, causing the rise.
So the company’s economic model plays a role in its success, as does its clever packaging and artful product descriptions. But to get to the real secret of Trader Joe’s, what might be the single biggest reason for its success, we talked to Sheena Iyengar, a professor at Columbia Business School who has been studying choice since 1990.
Iyengar was born in Toronto to parents who’d immigrated from India. She was particularly interested in exploring whether different cultures viewed choice differently. Her theory was that Asian American kids and white American kids might think differently about choice. Before comparing the two groups, she wanted to establish a baseline to confirm that, for the white kids, choice indeed had a positive effect.
This baseline experiment turned out to be pretty interesting on its own. Here’s how it worked: She brought a bunch of white three-year-olds, one by one, into a roomful of toys. Half of them were allowed to choose any toy, and they could switch as they pleased. The other half would be given just one toy with no option to switch.
What prior scientists would say — and had been saying for decades — is that choice is good. Therefore, the kids who could choose their toy should be happier and more likely to play longer. These ideas about choice were prominent not just in psychology; they were baked into the foundation of economic thinking at the time — that more choice is almost always better than less choice.
But when Iyengar started her study and brought in the kids who could choose from an entire roomful of toys, the children just looked at all the toys and then stared out the window. However, when she handed the other group of kids just some Legos, they happily started playing with them.
“And I was like, ‘Wait, this goes totally against what I’m supposed to find,’” says Iyengar, “‘there’s something wrong here.’”
So she went back and examined some of those earlier studies about choice and decision-making. She realized that when those researchers described giving people “lots of choice,” in reality that meant something like two to six options. Not a roomful, like she had tried. Around that time, Iyengar was frequently shopping at an upscale grocery store called Draeger’s Market, in Northern California. The store offered a lot of variety — hundreds of different kinds of mustards, vinegars, and olive oils. Iyengar would go to tasting sessions and try out 10 different kinds of vinegars, but she rarely bought any of the things she tasted.
Iyengar wondered if the store was offering customers too many choices. So she designed an experiment, at Draeger’s, to answer the question. She set up a tasting booth for jams. And she alternated the choice set: sometimes the booth would feature six different jams, and sometimes 24. She found that people were more likely to stop at booths with lots of choices, but that people were more likely to actually buy jam when presented with fewer choices.
A larger choice set, in other words, generates more interest; the smaller choice set generates more action. Sheena Iyengar’s jam study — very simple but very powerful — would go on to become one of the most famous studies in decision science. Because it illustrates what a lot of us feel when we enter, for instance, a gigantic supermarket.
“What the finding illustrated was that we want more choice presumably because of all the opportunities it provides us,” Iyengar explains. “But when it comes down to making a choice, we don’t want that choice to be too hard or too conflict-ridden or too burdensome.”
This phenomenon has come to be called “the paradox of choice.” But Iyengar doesn’t think that’s quite right. It’s not that more choice is always worse and that less is always better. She argues that choice is both a limiting and a powerful tool. Every context is different. You can imagine that a huge choice set is particularly welcome in the digital realm, where you can search for exactly what you want with a few keystrokes. But in the analog world — in the world of a grocery store, for instance — the size of a choice set matters. Not just because of the cost of real estate and transportation, storage and labor to stock the shelves. But because of how we, people, make decisions.
Envision a shelf in a typical supermarket: dozens of different types of toothpaste or tomato sauce to choose from. The typical supermarket sells 35,000 different items. Now envision a typical Trader Joe’s shelf. “It doesn’t overwhelm me,” notes Iyengar. “It usually gives me just a few choices per domain.”
Each Trader Joe’s store carries only 3,000–4,000 different items, and maybe just a couple different types of tomato sauce. And having just a few choices per domain is more likely to lead to action. Trader Joe’s understands less-is-more. It understands, to use a word of the moment, curation.
The thing that initially impressed Mark Gardiner, the former advertising executive who wound up working at Trader Joe’s, was how Trader Joe’s had grown so much without spending all the money that most firms spend on marketing, advertising, and so on.
But what impressed him once he got inside — working as a crew member for $12 an hour — was the company’s culture. During Gardiner’s training, it was quickly clear that the company carefully selected for the kind of chatty, extroverted workers that would connect with customers. As the training progressed, it also became clear that the executives weren’t too worried about training new hires in the logistics of running a grocery store.
“There was some discussion of process,” Gardiner says. “But actually there was a lot of discussion of Trader Joe’s values. There was a tremendous amount of discussion about how are you going to be with the customers.”
Seeing how Trader Joe’s encouraged its employees to interact with customers — to partner up with them — didn’t just make sense to Gardiner. It inspired him to wonder why this theoretically-obvious approach is, in fact, quite rare. Why couldn’t a trip to the DMV, for example, be less adversarial?
So, if you had the choice, would you have Trader Joe’s run the Department of Motor Vehicles? And maybe even… would you have them run America? Or at least would you try to export some of their collaborative, frugal, don’t-take-yourself-so-seriously methodologies?
Shortly after the episode from which this column is adapted first aired, Dan Bane, the CEO of Trader Joe’s, wrote us a letter on this topic. “In your latest Freakonomics Radio podcast,” he wrote, “you pose the question — ‘Should America Be Run by… Trader Joe’s?’ We are pretty sure such work would likely require a coat and tie. We like Hawaiian shirts… so we will pass, thanks.”
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