By shaping the consumer experience in a systematic and synergistic fashion and tapping into emerging cultural trends, Trader Joe's has taken the concept of providing groceries and created a differentiated, competitive brand. This article will examine the chain's consumer base by detailing an innovation analysis framework and observing relevant consumer trends the store is targeting. With this in mind, a look at the store's dynamics helps to outline principles essential to the company's success.

Framework for Success

One tool that is helpful with innovation strategy development is a framework called “10 Types of Innovation.” The ten ideas can be segmented into four distinct categories:

A. Offerings — the products and services delivered to a customer. Innovation types in this category include:
1) Product (improvements in product performance, specifications or quality).
2) Product system (the products/services bundled together in an interchangeable fashion to provide economies of scale for the manufacturer and personalized product offerings for the consumer).
3) Service (innovations in providing services, either related to a product offering or as its own offering).

B. Process — the tasks a business performs to create its market offerings. Some examples are:
4) Enabling process (internal processes that support a business as it conducts business, including human resources and information technology).
5) Core processes (used to generate a company's products or services).

C. Delivery — the ways a business connects its offerings to its customers. Components include:
6) Channel (delivering products to customers).
7) Brand (communicating what a company represents and stands for).
8) Customer/consumer experience (the overall experience that customers have when they interact with a business—from first attraction, to purchase, to an ongoing relationship).

D. Financing — the ways a company makes money (either the way it gets paid or the way it leverages business relationships). This encompasses:
9) Business model (innovation in generating revenue).
10) Networking (innovation in a company's joint ventures, alliances and value chain relationships).

This 10-point framework is of particular value when forming innovation strategies. Using it descriptively and prescriptively, a business can consider changes more holistically and look for opportunities to innovate around several types to provide greater value and competitive footing.

Relevant Cultural Trends

When analyzing Trader Joe's, it is necessary to understand emerging cultural trends that support its connection with people. Some of these trends are as follows:

Foods that seem healthy. Unlike people who ate healthy foods in the 1980s and 1990s, today's health seekers do not count the fat content of their cookies, or substitute canned shakes for food. Instead, they seek fresh foods made with natural ingredients and lots of flavor. Let's call these foods “healthy-seeming.” While, perhaps, they are not actually healthful, they provide freshness and ingredient cues that enable the consumers to feel good about what they are eating. Most importantly, they taste great, appealing to people unwilling to compromise taste in the name of health.

Not your father's TV dinner. Family and work demands leave most consumers with little time or energy to prepare elaborate meals. However, influenced by the likes of Martha Stewart, consumers want to eat at home and participate in food preparation. The trend is toward foods that are ready-to-make, not ready-to-eat. People want to get involved with the food they eat; they just don't want preparation to be too involving.

Goodbye, pepperoni; hello, curry pizza. Globalization, immigration and transportation have changed the nature of eating in the U.S. The myriad of produce, meats, spices and sauces is astounding. Not only are consumers trying more new foods and flavors than ever, they also are incorporating features and dishes from a variety of ethnic cuisines.

Less is more. Despite the recent expansion of big-box retailers, or perhaps because of it, people are beginning to revert to smaller, more manageably sized stores, some with a specialty focus. These retailers provide a less-overwhelming experience, which appeals to many of today's harried consumers. In addition, many consumers prefer to shop in places with limited inventories that reflect their particular considerations or needs. Consumers are not looking for more choices necessarily; they are looking for the right choices.

Where Trader Joe's Innovates

Trader Joe's has leveraged these cultural trends and innovated in the financing, offering and delivery innovation categories. These innovations have been designed to work together to give a great customer experience at a good value.

For example, in financing, Trader Joe's does not work with major food manufacturers. This has several benefits. First, Trader Joe's is in a better position to negotiate on price and delivery. Second, dealing directly with manufacturers eliminates the “middle man” cost (some 80% of the store's stock is privately labeled as Trader Joe's and manufactured specifically for them). Last, the company can avoid the demands of larger food manufacturers regarding product placement.

Trader Joe's does not demand slotting fees, so it pushes less cost back on the manufacturer. That helps it buy interesting foods at less cost. Its stores are not located in prime real estate areas and are much smaller than traditional grocers. For example, while a typical supermarket stocks between 25,000 to 45,000 items, each Trader Joe's carries between 2,000 to 3,000 items, which helps to manage real estate costs. By offering foods difficult to get elsewhere, Trader Joe's attracts underserved customers, who typically fall within a large disposable income demographic.

In the offerings area, supermarkets are well aware that consumers are overwhelmed with choices. More are saying, “Enough. I have too many choices...simplify.” Trader Joe's uses this trend as a strategy in and of itself: offering consumers fewer choices. This works well, especially given that Trader Joe's does not work with major food manufacturers, who might demand shelf space. This also helps to manage cost, as Trader Joe's does not need massive square footage to carry all the brands required of other grocers. Since many products are created to its specifications, the discount gourmet grocery store can tap into some cultural trends more easily. It can specify food that is “healthier,” interesting and easy to prepare at home.

Notice how its innovation in the offerings area works synergistically with its innovations in the financing sector. Offering fewer choices requires less real estate, which in turn keeps costs lower. In innovation strategy, this is a key concept: innovate holistically and synergistically.

Learning from Trader Joe's

Analyzing Trader Joe's provides insights into innovation and strategic planning. It highlights the need to think differently.

Businesses should understand and monitor cultural trends that can provide a relevant and compelling experience for consumers. No matter how innovative a business model is, or how great a product seems, a company will not find success unless it connects to the real needs of real people. This is less about chasing the latest fad and more about understanding deeply-rooted human wants. Create an infrastructure that helps employees to learn from the consumer.

Beyond cultural trends, one must understand the challenges and deep-seated needs of consumers. This goes beyond focus groups, which generally highlight more superficial needs or incremental improvements. Use anthropologists and social scientists to observe consumers' behavior and root out unfulfilled and unstated needs.

Innovate in areas that competitors are not involved in, and in more than one area. Executing innovations in only one area at a time leaves a business open to fast-following competitors. Innovating across the “10 types” is harder to recognize—and more difficult for competitors to copy. More importantly, if many in the industry are focused on product performance or core process innovations, one should innovate in a different category. Too often, industry players innovate in lock step with each other, furthering the trend toward making their businesses commodities. This is exemplified in the food industry, where numerous studies have illustrated the effect trade promotion has on lowering profit margins. In that setting, no one can establish a competitive advantage. Implement an innovation strategy that, while connected with people's desires, is a unique agenda.

Companies should pursue innovations that reinforce each other. Mutually reinforcing innovations, like those of Trader Joe's in finance, offerings and consumer experience, provide a synergy that the organization can leverage. It serves as a “platform” that is more valuable than the sum of its parts.

Links

• Doblin Inc.
• Trader Joe's