Some Speculation on Supermarkets

The US grocery chain Trader Joe's stocks only few items, according to this article by Beth Kowitt on the CNN Money site. Eric Crampton links and suggests - he's not quite explicit about it - that this is in reaction to the purported fact that too much choice can make people worse off, which is sometimes referred to as The Paradox of Choice. (I seem to recall recent research calling the earlier findings on this in question.)

The article also mentions that concentrating on a few items keeps costs for logistics down, which sounds like a more straightforward reason. But there's a third candidate. As the article mentions, Trader Joe's is owned by German supermarket giant Aldi Nord, and the piece makes the business model sound very much like a decidedly upscale version of Aldi. Their original discount stores here in Germany have a smaller selection of products than even the other discount supermarket chains (Penny Markt and Lidl). Long ago, I read an article which explained this as follows: What's Aldi known for? Low prices. How can you make money while selling at low prices? Mainly by buying at low prices. How do you put pressure on companies to give you low prices? Threaten to kick their products off your shelves. How do you make that threat credible? By acting on it from time to time. Basic game theory, really.

Result: There are some very popular products you just can't get at Aldi. Like the markets' unappealing looks and the long queues, nonavailability of these products is the nonfinancial price you pay for the low pecuniary prices. Many people are happy to make that tradeoff. Apparently, Germans are known in the international industry as being extremely price sensitive specifically when buying in supermarkets. If you have a kiloton of bruised peaches just mark 'em down and send 'em to the Krauts; they'll eat anything. (Anecdotal evidence confirms this.)*

This, while I'm at it, brings me to my one-factor theory of why Wal-Mart didn't make it in Germany. Apparently there are some complex managerial-organizational reasons, but as a consumer, let me say the following: They came over here trumpeting their low-low prices in each of their rather numerous ads. Then I went to one of their supermarkets and the prices weren't actually low, not by German standards. Meanwhile, the place looked like they should have been.

That's it. That's the theory. Good night.
*I have a feeling that somehow came out wrong. Did I say "came"? Oh god!


Eric Crampton said...

I don't know that Trader Joe's deliberately sought to make money by reducing decision-making costs for consumers by reducing the number of items. But if it's true that people just hate having too many options, the appropriate business strategy in response is pretty obvious. I'd then expect separating equilibrium where folks who like more choice go to places with more choices and folks who prefer more editorial discretion on their behalf go to places that provide it.

pj said...

I have a feeling that somehow came out wrong. Did I say "came"? Oh god!

Referencing Jarvis there?

LemmusLemmus said...

Had never heard of him. Great minds interject alike, I guess.