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