Trader Joe Case Analysis

Trader Joe Case Analysis:

Industry structure:

The supermarket industry is defined by retailers selling in majority perishable items destined for general public consumption, but also some other consumer goods. The supermarket industry is also characterized by smaller sized stores of approximately 50 000 square feet and less variety of products compared to supercentres such as Walmart with an average size of 185 000 square feet and very large variety of products (100 000 SKUs) but of larger than small discount stores of 7000 square feet. This industry is divided among several strategic groups: high end grocery stores focused on organic food and the like; traditional supermarkets and finally hard discounters offering products at low price. The food industry taken as whole from hard discounter to supercentre is quite consolidated with four main grocers in the united states taking most of the market share: Walmart, Kroger, Safeway and SuperValu but the rest of the market is highly fragmented with a lot of competitors.

Porter Five Forces: Industry level environment

Threat of new entrants: the supermarket industry has moderately high barriers to  entry since to sell perishable goods to end customers, companies either need to invest a lot in technologies to sell products via a website while mastering the delivery processes to balance supply and demand and/or to invest in physical infrastructures: the stores and the warehouses essentially. Moreover, in either cases, to enter the market the company would need preferential partnerships with suppliers and vendors, which can be hard to obtain due to the long-term relationships already in place with the current competitors within the market. However, these barriers to entry are easily overcame by companies already implemented in other food related industries: namely hard discounters and supercentres such as Dollar General and Walmart, which already possess such knowledge and infrastructures in other format and other products but can easily develop supermarket sized stores and have substantial funds to invest. Additionally, the supermarket industry has lots of new entrants and imitators of Trader Joe’s, such as Tesco; Walmart which introduced neighbourhood market and Walmart express concepts and lots of other players in the food industry such as Target, Kroger, Giant, Tops and Publix plan to enter the supermarket industry by launching smaller format. All in all, the threat of new entrant can be deemed very high and likely to drive the profitability down due to strong investment to maintain a distinctive positioning and attract customers through advertising.

Bargaining power of the suppliers: the suppliers are typically farmers or branded manufacturers related to consumer and perishable goods such as Coca Cola, Cheerio’s or Danone. This competitive force is moderate, since for most products the retailers decide which products to highlight and possess their own category of cheap products, therefore the retailer has a substantial clout during the negotiation of the prices with the suppliers, however for some highly demanded products such as Nutella, retailers cannot usually decide to not sell this brand for fear of loosing customers and thus cannot impose advantageous prices. Therefore, this force is not likely to diminish the profitability margins.

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