Trader Joe's -While reading the case, try to answer the following two

questions and be ready to discuss in class. Case discussion may

involve cold calling!
1. How do firms in the supermarket industry make money? This will
involve applying the Five Forces Model. Also, we will be
conducting a financial ratio analysis using the data in Exhibit 2.
Be prepared!
Grocery sales form a major item most supermarkets deal with.
The sale are accumulated on general merchandise such as
electronic items, apparel, household goods, hardware and toys
allows them to expand the range of product that supermarket sells.
also reduce labor costs with self-checkout lanes. They also offer low
prices by purchasing goods at lower price than competitor stores.
Not only that, they need to maintain good relationships with
suppliers to bargain for prices lower than larger stores. Some even
pay for goods 30 days after receipt, by using loss leaders
technique.
Having an existence of powerful substitutes like large
discount retailers (Target, Wal-Mart), pharmacy chains (CVS,
Walgreens) and even warehouse clubs (Costco, Sams Club, BJs)
increase the emphasis on grocery sales. Retail leaders such as WalMart and Target run highly efficient in operations. Lack of
differentiation across products and brands gives consumers a high
degree of bargaining power because they have little to no switching
costs between their rival competitors and brands because of the
growth of their competitor. Therefore, this allows customers who

want to do shopping both retail and grocery supplies can either shop
in small volume purchase or in bulk.
Strong competitors can be broken down into traditional,
premium, and discount stores. Supermarket industry is traditionally
low profit margin industry and those margins become increasingly
small when traditional supermarket face challenge in price with
other substitute retail stores. For example, Wal-Marts offer
comparably large inventory of grocery products at low prices.
Traditional supermarkets expect higher prices from their suppliers.
Firms such as Trader Joes have exclusivity with private labels, which
makes it difficult for competitor to get the source from the same
suppliers.
1. Financial Ratio Analysis and Strategy Reflection
Financial ratio analysis highlights how traditional supermarkets
are finding themselves squeezed between premium players such
as Whole Foods and discounters such as Aldi.
ROE
ROA
ROS
Debt to Equity
SGA/Sales
COGS/Sales
Operating Profit

Whole Foods
11.45%
7.98%
3.39%
43%
30%
65%
5.42%

Kroger
15.18%
2.56%
0.67%
492%
19%
79%
1.41%

Safeway
14.01%
3.43%
1.18%
309%
24%
73%
2.60%

Implications of analysis are as follows:

a) For both Kroger and Safeway, financial analysis indicates a
real lack of strategy and competitive advantage.

They are

neither differentiators nor low cost options. This is evident in

the following ways:

Operating margins are thin at 1.41% and 2.60% and

ROS are also low at 0.67% and 1.18% respectively.
Much of this is driven by the inability to price compete
due to lack of product differentiation in the traditional
supermarket space. COGS/Sales for both companies are
over 70% indicating competition for suppliers who are
not incentivized to provide low price or discounts to
traditional

supermarkets

especially

with

strong

substitute players such as Wal-Mart and Costco who can

buy in large volume.

Both Kroger and Safeways high debt to equity ratio,
492% and 309% indicates an inability to finance growth
without incurring large amounts of debt and should be a
major concern given a low ROS and operating profit
margin. The amount of debt being taken on is not being

justified by the earnings.

b) Whole Foods position as leading retailer of organic and
natural foods is evident when comparing its numbers across
the board with these two traditional supermarkets.
While COGS/Sales is only slightly lower at 65%, both
ROA 7.98% and ROS 3.39% are much higher.

Whole

Foods differentiates itself through selling premium

products for which they can charge higher prices for and
receive better deals with their suppliers for due to brand
image among consumers.

WF generally doesnt carry

nearly as much inventory as supermarkets, but has

higher markups on its products.

The above strategys success is reflected in a much
higher operating margin of 5.42% and an above average
ROE of 11.45%. Comparison to Kroger and Safeway in
ROE is not useful due to their inflated numbers, which is
evident when comparing debt to equity ratios for all
three firms.

Whole Foods debt to equity ratio is only

43% compared to 492% and 309%

Higher SGA/Sales percentage of 30% (compared to 19%

and 24%) could indicate more well paid staff and
therefore better customer service.