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 Wal-Mart 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 ReflectionFinancial ratio analysis highlights how traditional supermarkets are finding themselves squeezed between premium players such as Whole Foods and discounters such as Aldi. Whole FoodsKrogerSafeway

ROE11.45%15.18%14.01%

ROA7.98%2.56%3.43%

ROS3.39%0.67%1.18%

Debt to Equity43%492%309%

SGA/Sales30%19%24%

COGS/Sales65%79%73%

Operating Profit5.42%1.41%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.