Its founder called it the grocery store for “overeducated and underpaid people.” You’ve probably only heard of Trader Joe’s if you have one within a 30-mile radius (or if you have out-of-town friends who rave about it). Ever thought about how the niche grocery chain manages to be so small, so exclusive, so affordable, and yet turn such a large profit? We’ll give you a hint: it’s got a lot to do with their unconventional supply chain.

Background

The grocery industry is known for low profit margins, cutthroat competition, and lately, for losing an increasing percentage of market share to restaurants. But TJ’s, as its fans lovingly refer to it, seems to have cracked the code for success. Just about everything the grocery chain does is unorthodox. There’s no app, no loyalty programs. No advertising or social media. Customized, hand-painted murals give a local flair to each location.

But despite its low-tech, small-town vibe, Trader Joe’s makes big money. The store had a revenue of $13B in 2015 and takes in more revenue per square foot than any other leading grocery — selling $2000/sq ft in groceries compared to Whole foods’ $1200. And it accomplishes all this while maintaining shockingly low prices. Trader Joe’s products are cheaper than those at Safeway, Target, and Whole Foods, often by a lot. How does the store manage to offer low-cost, high-quality goods, with almost no marketing, while still pulling the kind of revenue it does? It boils down to a unique private-labeling model, efficient supply chain, simplified inventory, and a dedicated workforce.

Trader Joe’s Recipe for Success

A Pared-Down Supply Chain

A typical grocery store has 30,000 SKUs, while Trader Joe’s has fewer than 2000. This simplified inventory strategy doesn’t just enable more precise deliveries: it also nudges customers to buy more. Economist Sheena Iyengar says that in a grocery-store setting, contrary to our intuition, fewer choices can actually encourage people to buy more. The thing to note is that Trader Joe’s product offerings are intentionally limited, which makes delivering on their brand promise a simpler task than if they had tens of thousands of products to keep track of.

80% of this stock are private label items. This percentage is far higher than what one finds in a store like CVS or Safeway. By procuring products directly from suppliers, distributing them through its own centralized distribution network, and labelling them directly as Trader Joe’s brand, the store is able to offer the same quality for a much lower price. Annie’s instant pasta shells, for example, sell at Whole Foods for $3.29, while the same product under a Trader Joe’s label sells for just $1.49. But thanks to an attractive brand experience, and a commitment to customer satisfaction, these low-end “knock offs” feel high-end.

A Happy Workforce

It’s not just supply chain tinkering that makes Trader Joe’s a must-stop shop for its fans. The store also invests a huge amount of energy in training its workforce and making employees feel valued. Crew members are paid above industry-standard, and specialized training sessions welcome workers into the company culture before teaching them how to stock a shelf.

And these investments have paid off. Employee engagement is high and turnover rates are low at Trader Joe’s. With little emphasis on marketing and perks, customers are instead treated to an exceptional in-store experience, and the satisfied  — and eager to help — employees are a major part of this exchange.

The Clincher: An Obsession with Customer Satisfaction

While keeping close supplier relationships and offering an “exclusive”-seeming private label are huge ingredients in Trader Joe’s success, there’s one factor that truly cements this store as a fan favorite: an obsession with its customers. The store doesn’t try casting a wide net with advertisements or extensive product offerings. It caters to those who walk through its doors, to ensure that they keep coming back — and tell their friends. The store has a famously playful, mom and pop vibe that makes grocery shopping seem more like an exploration than a chore.

Trader Joe’s has more in-store employees per square foot than the usual grocery chain, and is focused on maintaining high levels of customer-employee interaction to improve the customer experience. Part of how they accomplish this is by being low-tech (you won’t find any self-checkout lines) and stocking shelves during store hours rather than at night.

TJ’s doesn’t need to spend millions on marketing. With creative and Instagram-able products, homey in-store layouts, and the feeling of exclusivity without the price, its fans are more than happy to do that themselves.