Natural Foods Merchandiser

Scope Out the Competition

A dollar store is going into a vacant space down the street from you, right around the corner from a no-frills grocery boasting everyday low, low prices. Or maybe a gigantic warehouse store is under construction, threatening to blot out the sun. Limited assortment stores are the latest rage.

Are they out to steal your business? Of course they are. But some will do it better than others. Like Costco Membership Warehouse, with Boca Burgers and Melissa's dried shiitakes on display, demonstrators sampling Van's waffles and Tazo tea, and a supplements department offering huge bottles at huge discounts.

Or Trader Joe's, whose tiny stores inspire slavish loyalty among foodies. Or even Big Lots, where an inspired browser can find Thai chili paste, Yogi Tea and 59-cent quarts of soymilk among the sugary cereals and off-brands of potted meat.

What defines limited assortment? In a nutshell: fewer SKUs. Compared to the 25,000 to 30,000 items in a mainstream supermarket, Trader Joe's stocks 2,500 items on average, Save-a-Lot about 1,000, Costco Warehouse about 2,000. But different chains approach the concept differently.

Limited assortment stores signal "low price" with cut-case displays, many private- label products and lack of extras like credit cards and courtesy clerks. SuperValu's Save-a-Lot, Aldi, Food4Less and Grocery Outlet push staple products like orange juice, peanut butter and rice, appealing to the shopper with a limited budget, says Neil Stern, senior partner at McMillan Doolittle, a Chicago retail consultancy.

Membership warehouse stores boost their ring with large packages, multi-packs and lots of impulse items. Costco shoppers skew upscale and the merchandise mix reflects that: To reach the bakery and private-label toilet paper, customers pass the latest literary bestsellers at half price, $49.99 cashmere sweaters and software at least 10 bucks cheaper than anywhere else.

Closeout stores offer distressed merchandise for much less than retail, pushing shoppers to snatch up a great find before it disappears. Dollar stores combine closeouts, distressed merchandise and private-label products with a gimmick like everything's-a-dollar pricing.

So How To Explain Trader Joe's?
TJ's, as its devotees like to call it, has turned the limited assortment category on its ear by focusing on specialty goods, many of them organic. The combo of low price, high quality and funkiness has attracted attention from retail watchers and steadfast devotion from fans.

In Sunflower Markets, a new chain expanding from Albuquerque, N.M., to locations in Arizona and Colorado, Wild Oats founders Mike Gilliland and Libby Cook aim to replicate TJ's small assortment and low prices while concentrating specifically on the natural/organic space.

What can a natural products retailer learn from these competitors?

Choose your merchandise carefully. Costco's relatively large selection of organic SKUs is remarkable considering the warehouse only stocks 2,000 items. "They don't carry a product just for the sake of carrying a product," Stern says. "They're carrying product that sells."

  • Don't stereotype your customers. Not all healthy eaters are upscale and suburban, and not all bargain hunters are poor. The Hartman Group found that half of all self-described heavy users of organic have household incomes of less than $30,000. In Urbana, Ill., university employee Melina Larson says organic eating is important to her, "but I am also poor." So Larson buys "all the hippie bulk spices and grains and Brown Cow yogurt" at her neighborhood IGA supermarket, and organic produce at the upscale Schnuck's supermarket and the farmer's market. She avoids the expensive naturals store in town. "I wish they wouldn't be so damn vegetarian about things," she says with a sigh.

  • Build a private-label program. More than 80 percent of Trader Joe's inventory consists of store brands, from Trader José's Salsa Autentica to Trader Giotto's Bruttini Cookies. Not only does the private-label program enable TJ's to control costs and strip out slotting allowances and distribution costs, but it reinforces the store's "tasty food at low prices" quality message. "The private label is actually a competitive edge," Stern says.

  • Offer something special. Stern claims his dad drives 30 miles out of his way for Trader Joe's peanut butter pretzels. Nondas Voll, a film and video producer in Sunnyvale, Calif., can't quite fill her regular shopping needs at TJ's, but "they have most things I like to buy, for less money." Among them: the chocolate caramel popcorn that Voll and her partner Ken Yee refer to as Trader Joe's Nuggets of Pure Evil.

  • Watch your overhead. Low-price offerings rely on procurement and operations policies that trim waste out of the supply chain. "The limited-assortment guys have got a formula that they have worked to a science," says Jim Hertel, senior vice president at Willard Bishop Consulting. Reusing vacant real estate, stacking cases instead of building shelves and cutting labor costs all work in their favor.

  • Make shopping fun. The "treasure hunt" experience is often cited as something consumers love about warehouse, dollar and closeout stores. "America will always look for the easiest thing, and America likes to try new things," says Harry Balzer of The NPD Group. Of Trader Joe's, Hertel says: "It's a unique operation, and it's a real treat."

  • Make lemonade out of lemons. Cost-cutting measures like asking customers to bring their own bags can be positioned as generating less waste. A sign in the parking lot of one Save-a-Lot says, "Bring a cart with you when you come in." Instead of apologizing for not offering services like courtesy clerks or credit card acceptance, the chain trumpets how it cuts the frills to save shoppers money.
  • Love your suppliers. Many retail-watchers cite Trader Joe's deep relationships with its vendors as a key factor in the chain's success. Granted, it's tough love—TJ's buyers strive for the lowest cost of goods and nothing gets on its shelves without approval from regional tasting panels. Figure out what your customers want, advises Hertel, and find the suppliers that help you achieve those objectives.

  • Don't be afraid to take a flier on something new. Many a small company without the cash for slotting fees got its first big break in regional warehouse clubs. If a new vendor presents a taste that knocks your socks off, make a deal, set up a sampling table and see if customers' socks are knocked off as well.

  • Finally: Be the best at whatever you are. "It's a lot less about being scared of what the other guy is doing, than making sure what you do has value for the customer," Stern says. "You'll drive yourself nuts reacting to what everyone else is doing."

Natural Foods Merchandiser volume XXIV/number 9/p. 38, 40, 44

Who Are These Guys?

A quick tour through the limited-assortment landscape

Type: Closeout Store
Where: Suburban strip mall
Impression: Everything from food to furniture
Your Customers Might Buy: Cascadian Farms Wheat Crunch, $1.99/14 ounces; Pacific Soy Fat-Free Vanilla, $0.59/32 ounces
Other Bargains: Hello! Toothpaste, $0.79/8.2 ounces; Cheeze Zip aerosol cheese, $1.79/can
Type: Dollar Store
Where: Strip mall, older suburb
Impression: Five and dime
Your Customers Might Buy: Nature's Promise Echinacea, 380 mg., $3/60 count; Vitamin C, 500 mg., $2/100 count
Other Bargains: Cherry Coke, $1/2 liter; American Pride pressed meat, $0.50/can
Type: Limited Assortment
Where: Converted chain supermarket, city neighborhood
Impression: Working-people food
Your Customers Might Buy: Faraon Chipotles en Adobo, $1.79/12 ounces; Saco Premium Cocoa, $1.79/10 ounces
Other Bargains: Dr. Pop, $1.89/12-pack soda; Smack Ramen, chicken or beef, $0.69/6 18-ounce packages
Type: Dollar Store
Where: Suburban strip, next to closed Phar-Mor
Impression: Five and dime
Your Customers Might Buy: Healthy Sense Echinacea, 400 mg., $1/20 count; C&H, Hy-Vee or Safeway Brown Sugar, $1/32 ounces
Other Bargains: 7-Eleven Candy Gulp, $1/5-ounce Juicee Gummee; Publix Ibuprofen, 200 mg., $1/40 count
Type: Warehouse
Where: Suburban big box with gas pumps
Impression: Upscale goods in a bargain-hunt wrapper
Your Customers Might Buy: Cascadian Farm Mixed Vegetables, $4.99/5 pounds; Maranatha Peanut Butter, 2 26-ounce jars, $6.99
Other Bargains: Thierry & Guy 2001 Fat Bastard Shiraz, $84.99/case; Kirkland Signature Daily Multivitamin, $11.49/500 count
Type: Limited Assortment/Specialty
Where: Small storefront, foodie neighborhood
Impression: 1970s beachfront decor
Your Customers Might Buy: Trader Joe's Organic Low-fat Yogurt, $2.49/quart; Trader Darwin's 100% Natural Vitamin E, 400 IU, $6.99/100 count
Other Bargains: Cabot Extra Sharp Cheddar, $4.39/pound; Small Chinese Scallops, frozen, $3.99/pound.

Natural Foods Merchandiser volume XXIV/number 9/p. 40

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