Warren Buffett's Moat: How Sustainable Is Trader Joe's Competitive Advantage?

Success is a remarkable achievement, and sustaining it is even more impressive. Famous for his principles of value investing, financial expert Warren Buffett coined the term economic moat, which refers to a company's competitive advantage that is instrumental for its overall prosperity. Today, it is crucial to consider the strategy of an individual company and how that strategy is incorporated into its overall business model.

For example, consider the grocery retailer Trader Joe's. Originally a small chain of convenience stores, Trader Joe's has grown to become one of the most prominent grocery chains in the industry. Founded in California, the chain now spans the United States. It has become notorious for its marketing techniques and even started what is known as National Appetizer Day, a promotion to engage customers. The company strives to promote healthy, economical food and drink options for consumers. Expansions have led to a variety of wine and alcohol options, a methodology to attract even more consumers. Clearly a staple in the grocery industry, Trader Joe's offers a number of competitive advantages relative to its marketplace counterparts.

Compared to its competitors, including Whole Foods Market, Inc. (NASDAQ: WFM), Trader Joe's is viewed by customers as an affordable option. The price alone, however, isn't the only appeal; the quality of food is not compromised as consumers find bargain items. One of the main reasons that the chain can offer lower prices is that many of the products are made in-house, or are exclusive to Trader Joe's locations. Streamlined internal processes allow lower costs of production along the way, with the savings passed on to consumers. The organization also purchases directly from suppliers and does not charge additional fees to its suppliers for premium shelf space. The model is viewed as reciprocal, as Trader Joe's receives favorable prices, and suppliers save on marketing costs.

As a measure to ensure that suppliers do not increase prices, Trader Joe's representatives negotiate volume contracts. This approach allows for both low costs and inventory management. Again, the food and beverage items sold are exclusive to the chain. Competitors such as Whole Foods do not have the luxury of these discounts, and consumers can turn to less-expensive chains for alternatives.

Too often, large corporations neglect the purchasing habits of their consumers. With affordable prices, Trader Joe's recognizes the optimal pricing structure for its target market. More expensive chains do not have the option to optimize prices; they must seek value for their customers through product differentiation. For instance, Whole Foods does not emphasize price but it does aim to offer organic, grass-fed and free-range food options. With these products being classified as healthier than traditional options, the differentiation strategy becomes apparent.

In order for Trader Joe's to continue determining its optimal price points, it must seek feedback from consumers. Each year, the chain posts the results of its annual customer choice award winners. These results emphasize the food choices that were most-preferred by customers in that particular year, in categories such as bakery, beverage and candy. Moreover, the company has a policy of removing products from store shelves if it finds they are not selling at noteworthy levels.

Taking advantage of real estate is yet another measure that Trader Joe's employs. Analysts within the industry note that the chain sells almost twice as much per square foot as its main competitor, Whole Foods. This unique strategy allows consumers to view and choose more products in a given area, thus making them more inclined to find what they are seeking. Ultimately, the approach is sustainable assuming that Trader Joe's continues to lay its stores out in consistent patterns. The result triggers a positive perceived value to the consumer.