Thursday, April 7, 2016

Don't put too much credence in reports that TJ's is lowering prices across the board

Over the last couple of weeks, a story's gone viral about Trader Joe's (perhaps) introducing a sweeping set of price cuts.

Aggregators like Business Insider and slightly more reputable sources like Fortune picked up this story, which originated with a quick research trip by an investment analyst for Deutsche Bank. The analyst did a "cart comparison" of 77 grocery items, purchased at Whole Foods and TJ's. Apparently an earlier comparison found TJ's 15% cheaper, while the more recent check showed TJ's to be 26% cheaper.

The reason an investment analyst would do this in the first place is, Whole Foods is a publicly traded company. Investors are curious about Whole Foods strategy going forward, including plans to spin off a new smaller grocery store concept that seems to be a more direct competitor to Trader Joe's.

Right off the top of my head, I can think of two reasons to question the simplistic conclusion that TJ's is dropping prices. The first has to do with the design of this experiment: if Deutsche Bank wanted to determine whether TJ's was lowering prices, the way to do that would be to compare a current TJ's 'basket' with an earlier identical selection of goods. They didn't do that; they just used Whole Foods as a benchmark. Nothing I've read points specifically to TJ's lowering prices, as opposed to Whole Foods raising them.

And, they noted that the price disparity was greatest in produce. While I'm a big fan of TJ's as a company and a brand—and while I'm no fan of Whole Foods—no grocery expert would ever say that comparing TJ's produce to Whole Paycheck's was an apples-to-apples comparison. Produce is a TJ's weak point, and a Whole Foods strong point.

Meanwhile, if there are any current Trader Joe's employees who want to weigh in on the "price drop" story, feel free to contact me through this web site. I'd love your insights.

Friday, March 11, 2016

Whole Foods rebounds, but there's a difference between the stock market and, well, a food market

Whole Foods stock has taken a pounding over the last year or two. Same store sales have fallen, as lower-price rivals from Costco to Walmart have increased their organic food offerings.

Whole Foods was also hurt by a weights-and-pricing scandal that added insult to the injury of already-high prices.
The first '365' store will open in a few months. Like Trader Joe's, it will offer a smaller-than-usual number of SKUs and emphasize Whole Foods' private-label products. I imagine they'll do a better job than Trader Joe's when it comes to produce, but the key to profitability will be prepared foods. Whole Foods seems to be doing a lot right, right now. But can 365 stores develop a TJ's style cult following? As readers of Build a Brand Like Trader Joe's can guess, I think it's all going to come down to the customer experience. So, I'm dismayed that Whole Foods is cutting staff at the same time... 
The company's responded to increased competition by launching a new line of smaller stores, called '365', that are plainly modeled on Trader Joe's. While the stock (NASDAQ: WFM) has climbed about 10% so far in 2016, it's still trading near a 5-year low.

So is this a good time to buy in? Maybe, but as an afficionado of the Trader Joe's business model, I'm put off by Whole Foods' recent announcement that it was going to cut 1,500 jobs. Trader Joe's outperforms in the grocery category in large measure because it is way overstaffed, by the standards of typical market.

Wednesday, September 30, 2015

Undrinkable? Maybe. Soon to be unbreakable? Probably.

There's a wide range of glass thicknesses used in the wine business. Bronco Wine already packages Charles Shaw wines in very thin/light bottles, which might explain why there's so much breakage in the stores. Moving to PET packaging would improve margins and reduce breakage.
Anyone who's worked in a Trader Joe's store knows that several times a day, there's a wet cleanup in the wine department—usually no great loss, as it's just a bottle of Two-buck Chuck. 

That may soon be happening a lot less frequently, because Bronco Wine, the supplier of TJ's most famous plonk, is experimenting with plastic bottles. The bottles are supplied to Bronco by a company called Amcor. They're made from PET, which stands for polyethylene terephthalate, lined with a silicone oxide barrier (trademark: Plasmax). The purpose of the Plasmax inner coating is to prevent the oxidation through the package.

Currently, Bronco is testing the packaging with its Green Fin white wine, which is packaged only for Trader Joe's. The plastic bottles are lighter than glass (of course) and are fully recyclable. While crew members in stores will appreciate reduced breakage, there are a number of advantages including faster fill-rates (the rate at which bottles can be filled, capped, and put into cartons in the plant) and lighter shipping weights.

PET is the same plastic used for a lot of the small bottles of wine served on airplanes (though not usually in First Class!) If you've bought Jack Daniels in a plastic bottle, it was also made of PET.

Friday, March 20, 2015

Two guys named Kevin hold Two-Buck Chuck for ransom

This week, Trader Joe's was named in a class action suit alleging that many California wines—including “Two Buck Chuck”—have unsafe levels of arsenic. Some wines have up to five times the arsenic allowed in drinking water. 

The State of California (and the U.S. EPA) specifies that drinking water cannot contain more than 10ppb (parts per billion) arsenic, a toxic heavy metal. There is no standard for wine. Specifically, the sample of Charles Shaw White Zinfandel was found to have more than 20ppb of the toxic heavy metal.

The lawsuit, which was first reported by CBS News, has generated a ton of publicity very quickly. It’s a regular meme, right now. The suit was brought by a lawyer named Brian Kabateck, who was alerted to arsenic levels in popular (read: cheap) wines by BeverageGrades, a company run by two guys going by the name Kevin.
According to his website, "Mr. Kabateck’s vigorous litigation on behalf of his clients has netted more than a billion dollars in recoveries. He has won many multi-million dollar verdicts, judgments and settlements in the areas of personal injury, insurance bad faith, pharmaceutical litigation, wrongful death, class action, mass torts and disaster litigation... Because of his deep knowledge of the law and dynamic speaking style, Mr. Kabateck is a frequent analyst for national, local and legal media outlets. He makes regular appearances on CNN, MSNBC, CBS, NBC, ABC, FOX  and CW stations. In addition to his television exposure, Mr. Kabateck often speaks at seminars, law schools and industry events. 
I suppose it’s possible that Kabateck is in it for more than just the money. It’s possible that he really does have the safety of California wine consumers at heart, but is just misinformed.  

But whether Kabateck wins his lawsuit or not, this publicity is a gold mine for the Kevins and their BeverageGrades business. By highlighting the “dangerous” levels of arsenic in some wines, they’re effectively pressuring winemakers to pay for BeverageGrades' testing and rating service. Until now, they haven’t had that much business, since they’ve only given their ‘Seal of Approval’ to about 150 wines in total. 

Kerry Hicks (left) was identified as Kevin Hicks in BeverageGrades' own press release about arsenic levels in cheap California wines. Hicks' previous business was HealthGrades, a web site that rates doctors and hospitals and which claims to get a million hits a day. That's a lot more interest than BeverageGrades has ginned up, until now. Kevin Byrne is Hicks' business partner.
I’m not just a conspiracy theorist when I suggest that Hicks & Byrne have purposely manufactured a problem—or should I say, 'hysteria' about arsenic levels in wine—in order to promote their solution, in the form of BeverageGrades ‘A+’ rating. (Which, by the way, is the only rating they offer; it’s either A+ or, by inference, poison.) 

BeverageGrades has pretty much admitted that’s exactly what it set out to do. A day or two after their carefully orchestrated story broke, they had the gall to send a professionally written press release to, reading in part...

BeverageGrades provides comprehensive health and nutritional information for alcoholic beverages via testing in its independent, state-of-the-art lab, using methodology developed by the American Organization of Analytical Chemists. BeverageGrades offers two health panels for screening products for the presence of contaminants in levels that exceed regulatory standards; these include heavy metals in one panel, and pesticides in in the other. The company offers an A+ BeverageGrades Certification to specific products that fall below certain regulatory thresholds in panels of heavy metals and pesticides... 
Our goal is to be the beverage industry’s top resource for analytical product information, so producers are able to remain in compliance with regulatory provisions, and maintain consumer trust.

Don’t be fooled by the coy language, that’s little more than a fucking ransom note. What they're saying to the wine industry is, "First we'll shake consumers' confidence in your products with this bogus arsenic scare. Then, you can pay us to rebuild consumer trust with our pseudo-scientific Seal of Approval." So, what’s been lost here? Well, business ethics, obviously. But another thing lost is scientific perspective.

Yes, it’s a fact that arsenic is toxic. Some arsenic compounds are very, very toxic. But since Kevin/Kerry Hicks is a medical doctor, he knows that small quantities of arsenic have long been safely used in both traditional and western medicine.

Here are the facts: While California and the U.S. EPA set a cautious level of 10ppb for arsenic in drinking water, many other places either don’t regulate it or allow much higher levels. The EPA accepted up to 50ppb until 2006.

There is no scientific evidence to support the lawsuit’s claim that arsenic levels in Two Buck Chuck represent a health threat. Acute arsenic poisoning results from the ingestion of more than 100mg of arsenic. That means that you’d need to consume all the arsenic in at least 7,000 bottles of cheap rosé at once, to poison yourself.

Of course, the implied threat is not acute poisoning, but the carcinogenic effects of long-term, chronic exposure. That's a real thing, although all the studies have looked at well water with far, far higher levels of arsenic than BeverageGrades found in wine. The most-cited study, of a population exposed to arsenic in Taiwan, looked at people drinking water with at least ten thousand times as much arsenic in it. And, the people most susceptible are children, especially in utero. Children and pregnant women shouldn't be big wine drinkers anyway.

Those poor Taiwanese people were drinking water loaded with arsenic. Other studies have established toxicity at lower levels, but not at the 10ppb level set for water, which is the level BeverageGrades claims is also unsafe in wine. Estimates of the toxicity at those levels are extrapolations. 

According to Health Canada, if you spent your lifetime drinking water with 10ppb arsenic your odds of dying of cancer would be 0.3% higher than if your water had no arsenic at all. So if you're an American man with baseline odds of dying of cancer of 1 in 4 (estimate: American Cancer Society) raising the arsenic level in your water by 10ppb would increase your odds to 1 in 3.98. A woman's chances of getting cancer are about 1:5, so they'd go up to 1:4.98.

To put it another way, in a hypothetical population of 1 million people you'd expect, say, 22.2% of population to die of cancer and 77.8% to die from all other causes. If the arsenic levels in that population's drinking water were to be raised by 10ppb, you'd expect 22.5% of them to die of cancer, leaving 77.5% of them to die of all other causes. Again, these are estimates, based on extrapolations from toxicity at much higher levels. It's not possible to accurately measure the risk from drinking water at 10ppb, because the risk is so small that it's lost in standard deviation.

The reason there are no arsenic levels established for wine in the U.S. is that there is no evidence that wine has ever been a dangerous source of arsenic for anyone. 

Even if you look at the highest concentrations of arsenic that BeverageGrades found, and assumed that all the arsenic they found was the most toxic form, you’d die of cirrhosis, diabetes, or in a drunken car crash long before you’d accumulate a toxic dose of arsenic. Not only that, but as BeverageGrades knows, the cheap wines that showed high arsenic levels are blends of grapes from all over the state, that change all the time. There’s no reason to believe that those wines’ arsenic levels will be the same next month, let alone next year. 

The Ontario (Canada) Vintners Quality Alliance standard, which is reserved for high-quality wines that are far above minimum standards, allows for 100ppb arsenic. The highest arsenic levels found by BeverageGrades were about half that amount.
Kabateck Brown Kellner is going after Trader Joe's, the Franzias, and a few others because they’re huge targets with deep pockets. BeverageGrades released those brands' arsenic levels to Kabateck because Hicks & Byrne know TJ's and the rest of the commodity winemakers will never pay them for a good rating. But if they can hurt TJ's, they'll scare other winemakers into paying what amounts to protection money.

Don’t get me wrong; Two Buck Chuck is shit. But this lawsuit is bullshit, and BeverageGrades’ strategy is nothing less than corporate piracy.

Here's the full list of companies named in the suit:

  • Sutter Home Winery
  • Trinchero Family Estates
  • Folie a Deux Winery
  • California Natural Products
  • Golden State Vintners
  • Varni Brothers Corp.
  • Treasury Wines Estates Americas
  • Beringer Vinyards
  • Seaglass Wine
  • Constellation Wines
  • Hahn Family Wines
  • Smith & Hook Winery
  • Raymond Vinyard and Cellar
  • Fetzer Vineyards
  • A. Korbel & Bros.
  • Mason Cellars
  • Oakville Winery
  • Woodbridge Winery
  • Simply Naked Winery
  • Winery Exchange
  • Sonoma Wine Co.
  • Don Sebastiani & Sons
  • Bronco Wine Company
  • Trader Joe’s Company
NOTE: This version includes changes to the math/statistics to make it more accurate and easier to understand. It corrects some arithmetic errors that appeared in the first 18 hours this post was live. The errors were not substantial.

Wednesday, February 18, 2015

If Trader Joe's was a car, it'd be a Subaru (according to these guys)

How does TJ’s famous customer satisfaction compare to other brands, in other sectors?

The other day, my Google news feed led me to a story about how Trader Joe’s (and Wegman’s, another great grocery business) had displaced Publix as the customer-satisfaction champion in the supermarket category. When I tracked the story back to the American Customer Satisfaction Index, however, I learned that 2014 was the first year ACSI had questioned consumers about Trader Joe’s, so the results of the survey don’t necessarily indicate a change in the relative performance of TJ’s or Publix (which is also a chain that I respect.)

ACSI claims that the scores are comparable not just between brands in any one category, but between brands in different categories. With that in mind, I dug into their stats to learn how Trader Joe’s customers’ satisfaction compares to people’s satisfaction with, say, their cars or phones. The comparison was enlightening.

Trader Joe’s (and Wegman’s) scored 85 on the ACSI satisfaction scale. That’s epic. To put it in perspective, no airline got into the eighties last year. Even Southwest scored only 78. No major cellular telephone provider came close, either.

In the clothing category, VF came closest. The maker of Lee Jeans scored 84.

Of the major hotel chains, only Marriott cracked the ’80’ barrier, although amongst luxury hotel chains, Marriott’s Ritz-Carlton subsidiary beat out TJ’s with an 86.

Perhaps unsurprisingly, Apple scored an 84—by far the highest among personal computer brands.

If TJ’s was a car, what car would it be? Subaru shares its customer satisfaction score of 85. Only Mercedes-Benz did better (although Lexus and Volkswagen were both within the margin of error.)

What about comparisons with other food categories, or other retailers? Well, Starbucks scored a paltry 76. I note that the highest score for all fast-food is “All others”. I.E., any small local fast food outlet will likely outscore any major national brand. That’s food for thought, eh?

Food manufacturers did much better. H.J. Heinz, Hershey, Mars, Quaker, Nestle, and General Mills all equalled or bettered TJ’s score. That supports my general theory that it’s TJ’s customer service—not products—that drives fan loyalty.

Among other retailers, Costco and Nordstrom put up functionally identical scores of 84 & 86, respectively. Amazon also scored 86—by far the best among web retailers surveyed, but they didn't ask about Zappos.

The ACSI web site doesn’t provide enough statistical background for me to tell you how significant a one-point difference in score really is. I suspect it’s not significant at all. Still, their brand rankings ring true. And one thing’s certain, TJ’s has built its incredible brand with far, far less advertising than any comparable brand, in any industry. If you want to know the secret of how they did that, you’ll have to read my book.

Thanks to Google, I found this photo of a Subaru in a TJ's parking lot while sitting at my desk in my pajamas. And yet, Google's own Customer Satisfaction score is well below Trader Joe's. Perhaps it's that we don't fear that, one day, Trader Joe's will actually rule the world as a dark and imperious overlord. (Just kidding, Google. I love you guys.)

Monday, January 26, 2015

A lesson IKEA could learn from TJ's (but probably won't)

Last year, IKEA came to the Kansas City metro for the first time. My friends asked me if I was going to get a job there, and write a book about that brand—the way I did when Trader Joe's arrived a few years ago.
Trader Joe's customer service is to IKEA's customer service what meatballs are to poo.
I didn't, but I can't help myself, when it comes to analyzing customer service in any retail setting. What I've learned is that, when it comes to front-line customer service staff, IKEA's no Trader Joe's. Based on my observations, IKEA could learn a lot from TJ's.

Read my article on Medium here.

Monday, October 6, 2014

The keys to TJ's success with 'Millennials'

I was recently interviewed by Hanna Chalmers, the head of research at Mediabrands—the ad giant Interpublic's in-house nerd department. The topic was, Trader Joe's success with 'Millennials'. (Millennials=people who came of age post-2000. Some demographers define this group as people born between 1982-2004.)

I'm quoted in this report. If you're interested in marketing to Millennials, you can download it by clicking the image.
The report was published by Initiative, a hip agency based in London, England, that is part of IPG. Here's the full text of my interview with Hanna. Do you agree with me? What do you think is the secret of TJ's success with younger consumers?

Mediabrands: What is at the root of Trader Joe’s success?
Mark Gardiner: They’d tell you, “We’re a product-driven company,” and that’s part of the story. But TJ’s incredibly strong brand—and the company’s sustained growth and financial success in a very difficult category—is rooted in millions of face-to-face interactions between shoppers and front-line retail staff. 
TJ’s ‘crew members’ are famously chatty and cheerful (sometimes annoyingly so!) The brand relies on the oldest trick in a merchant’s book: Friendly, personal service.
Mediabrands: Is their secrecy part of their success?
Mark Gardiner: Yes and no. The company’s cutthroat management style is not consistent with the friendly, laid-back vibe in the stores. For example, TJ’s didn’t stop selling red-listed fish until Greenpeace lampooned it with a Traitor Joe’s website. 
So they have to be secretive, in order to prevent a sort of cognitive dissonance amongst shoppers. But it’s to the point now that the company’s secretive ways are becoming the story. 
The counter-example here would be Patagonia. Their front line retail staff can be a little snotty, but the company’s management is remarkably transparent, and the company lives its brand values, all the way up the org chart, and throughout its procurement and manufacturing.
A collection of marketing and agency types gathered in Farringdon, in central London, to listen to Hanna and a few of her co-workers present their insights into Millennial consumers.
Mediabrands: Why is it particularly successful with Millennials?
Mark Gardiner: It’s worth noting that there are things you might expect TJ’s to do well, that they don’t do at all. For a hip California company with a devoted following of young consumers, they have almost no social media presence. The company has a relatively rudimentary web site, a moribund Twitter feed, and no official Facebook page.
At the product level however, TJ’s ‘gets’ Millennials. People under 35 today were the first demographic group raised entirely in the era of Hot Pockets, Lunchables, and the Starbucks drive-through. In the U.S., they attended schools in which Home Economics classes had been cut back. Sure, they watch cooking shows on TV, but they’re not big on practical kitchen skills. Perhaps that’s why snacks and prepared meals (particularly frozen meals) contribute most of the profit from TJ’s food sales. 
Relatively sharp prices and a good assortment of cheap, drinkable wine are also strong selling points for the under 35 crowd; in the U.S. they’re all still paying off their student loans!
One New York Times journalist called TJ’s “the home of lonely food”, which is an evocative way of describing the single customer who has worked late, and stopped by TJ’s on the way home to pick up a frozen mac ‘n cheese or pre-made salad and a bottle of Two Buck Chuck, that they’ll eat alone, while updating their profile.
In that context the warm, friendly TJ’s shopping experience is a welcome relief. The company may not get social media, but it understands the value of that real-world social experience. 
Mediabrands: What is at the essence of the brand?
Mark Gardiner: A fun, friendly shopping experience, that makes the things you buy there seem even better.
The key to this is, hiring the right people. As I explain in my book, “Build a Brand Like Trader Joe’s”, you can train skill, but you have to hire attitude. 
TJ’s offers good wages and benefits, and the store seems like a fun place to work. (Imagine, as a 30-something, telling your peers, “I work at McDonald’s.” They’d think, “loser”. Tell them you work at Trader Joe’s and the response is, “Fun! I love that place.” As a result, TJ’s has its choice of employees. And it uses that choice to hire natural extroverts. 
Millennials are skeptical about a lot of the things companies do to promote their brands, but the authentic contact they make with TJ’s employees (who skew, age-wise, into the same category) isn’t perceived as “marketing” or “corporate”. It comes across as authentic, because it almost always is authentic. Crew Members create authentic connections with customers—not because they are told to do so, or trained to do so (although they are told, and trained) but rather because that’s who they are.
Mediabrands: What does it understand that other brands in its category don’t?
Mark Gardiner: A.) TJ’s doesn’t try to please everyone.  
Fun exercise: Google “Why I hate Trader Joe’s” and “Why I love Trader Joe’s”. You’ll see the same traits listed in both places. But TJ’s knows that if half of America’s grocery shoppers love its brand, that’s more than enough to be profitable; who cares if the other half hates them?
Wishy-washy companies that try not to offend anyone don’t give anyone a reason to love them, either.
B.) TJ’s understands that paying front line customer service staff a little bit more is a great investment. MIT prof Zeynep Ton’s research has amply proven that the retail chains that pay staff the highest wages have higher rates-of-sale and are more profitable. Retailers who increase customer service pay show increased profits, and retailers who cut staff costs typically lose profit as a result.
Trader Joe’s pays better than average retail salaries, and offers better than average benefits, so it can easily recruit employees who will naturally extend that cheerful, sociable brand. 
The company’s built one of America’s most valuable brands virtually without advertising. That savings alone would easily cover the cost of paying customer service staff another $2-$3 per hour.
Mediabrands: What is the future for Trader Joe’s – what risks do you foresee?
Mark Gardiner: TJ’s has lots of growth potential in the U.S.; it could easily double sales volumes by expanding into markets where it is not active at all, and many markets that have 2-3 Trader Joe’s stores could support twice that many.  
The company’s been successful because it’s always focused on the relationship between customers and the store, and saved the hard bargaining for its relationship with suppliers.
The biggest risk is that the company’s current CEO is an accountant, not a merchant. I think TJ’s is beginning to see it’s crew members as a cost center and not as a key source of the company’s profits.
Mediabrands: What can other brands learn from Trader Joe’s?
Mark Gardiner: Hire the right people, then have the courage of your convictions and really empower them to live and promote your brand values. The authentic connections they make with consumers are priceless—especially so when the consumers are Millennials who’ve long been jaded when it comes to ‘messages’ from brands.
If you’re a highly-paid VP Marketing, that’s scary advice. I’m telling you to place your brand—perhaps your company’s most valuable asset—in the hands of your lowest-paid employees. 
But think of it this way: Those front line employees have always been empowered to reduce the value of your brand. No matter how great your new product or ad campaign, if the customer comes to the store and is treated poorly, they’ll hate your company. 

Since your customer service staff can already reduce your brand equity, you have nothing to lose by empowering them to increase it.