Wednesday, August 15, 2012

Tofutti Brands Inc, finds Trader Joe's a tough cookie

Tofutti Brands recently reported a 17% decrease in net sales, and admitted that "Sales in both the thirteen and twenty-six week periods continued to be impacted by the decision of Trader Joe's, formerly the company's largest customer, to discontinue stocking branded goods in mid-2011." 

The companies that supply Trader Joe's products are always sworn to secrecy, but it's safe to now assume that Tofutti Brands was a supplier of some of Trader Joe's soy-based non-dairy cheeses and/or desserts. 

Trader Joe's is a notoriously tough customer, with a reputation for hard bargaining to begin with, and a notable willingness to discontinue products when suppliers insist that costs must rise. That was almost certainly the case at Tofutti Brands, judging from this statement by Tofutti CEO David Mintz.

"During the first six months of 2012, our gross margin percentage improved due to the positive effect of price increases put into effect in the second quarter coupled with our ongoing program to eliminate marginally profitable products." I'll bet that Tofutti realized that Trader Joe's had negotiated prices which rendered its contract 'marginally profitable', but when Tofutti told TJ's prices had to rise, TJ simply dropped them as a supplier.

A supplier negotiating with almost any other grocer has some leverage by arguing that customers count on finding their products on the shelf, and that if they can't find them in one store, they'll go to a rival store to buy them. That doesn't work at Trader Joe's for two reasons: 

  • Since almost everything's branded Trader Joe's, customers actually don't know what the comparable products are in other stores. 
  • Trader Joe's is perfectly willing to discontinue even popular products, often over very small price increases. Joe knows that his relationship with his customers is so strong, that he can put some other product in that shelf space, and turn a similar profit. Joe's customers are so devoted, they'll put up with almost any product being discontinued.

Trader Joe's loves to be its suppliers' biggest customer -- and loves being a supplier's only customer even more. They have clout in with suppliers because they pay on time and they don't nickel-and-dime suppliers with slotting fees and marketing allowances. The risk to suppliers is, once Trader Joe's feels a supplier is depending on their business, they're merciless bargainers.

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