The online grocer is defying the odds and expanding during the economic downturn
Source: Bloomberg Business Week
Keywords: FreshDirect, Richard Braddock
During the dot-com boom in the late 1990s, several online grocery companies like Priceline's (PCLN) grocery division and Foster City (Calif.)-based Webvan burst on the scene. They expanded aggressively into various cities. But when the bubble burst, capital dried up, and these companies went bankrupt.
During the current downturn, FreshDirect, the online grocer, based in Long Island City, N.Y., is defying the odds. CEO Richard Braddock (formerly the CEO of Priceline) says that while previous Web grocers used capital to expand, he is focusing on the customer experience. "We are going to make mistakes," he says, "but we will make you feel special, and our job is to offset the inevitable mistakes with some great solutions and great service."
The Information Edge
The edge for FreshDirect, says Braddock, is its extensive database where it can gather more information about shopping patterns and behavior than a traditional bricks-and-mortar grocery store can. Finding ways to provide better customer service to the most loyal customers is particularly important during a downturn, he argues. "The core issue now is that consumers are paralyzed with the fear of the unknown, and that is holding back their spending," he says. So retailers like FreshDirect need to get creative about finding ways to increase sales.
Using its database, FreshDirect launched a new feature this spring that analyzes a customer s previous shopping trips and prompts them at the checkout stage when they have forgotten something they typically buy, a technique online retailers like Amazon (AMZN) have used for some time. Braddock is pleased with the results so far. Almost 20% of FreshDirect customers are prompted by the reminder feature on a weekly basis, and they have increased their order size on average by 10%. Almost all customers have now used the feature at least once, says Braddock.
FreshDirect has also launched several products that appeal to the new frugality among consumers. Since more Americans are eating at home to save money, FreshDirect last fall rolled out 50 heat-and-eat meals (dubbed "4-Minute Meals"), that cost $7 to $15 apiece and are designed by chefs like Terrance Brennan and restaurants like Tabla and Rosa Mexicana. Braddock says these could not be duplicated by a competitor, because they use a unique microwaveable format—discovered in France—that keeps ingredients fresh. Traditional grocery stores would face the challenge of spoilage if they carried 50 ready-to-eat meal options like FreshDirect does, says Braddock.
Office Vending
FreshDirect has also used the recession to expand its corporate business. Since many companies have cut their travel and expense budgets and decreased their meal allowances for employees, FreshDirect has started rolling out vending machines in office buildings in Manhattan. These machines sell the 4-Minute Meals and are being marketed to companies in industries like advertising and media where employees tend to work late.
FreshDirect continues to plan new rollouts for the rest of 2009 as part of its strategy to keep improving customer service. In 2008, CEO Braddock realized that one of the biggest obstacles to ordering groceries online is that consumers can't inspect and touch perishable food. So in December, FreshDirect introduced a rating system whereby a team of inspectors rated produce daily for color, taste, firmness, and ripeness. Starting in July, FreshDirect will offer the same five-star rating service for seafood.
McConnon is a staff editor for BusinessWeek in New York.
Analysis: FreshDirect Capitalizes on the Downturn
FreshDirect has launched several smart initiatives, but challenges remain both for this Web grocer and its competitors
FreshDirect has succeeded where other online grocers, such as Webvan, failed because the company's executives had considerably more grocery experience when they founded the company, and they knew how to make a Web site appealing to consumers, says Russ Winer, chairman of the marketing department at New York University's Stern School of Business.
Another factor in the success of FreshDirect's operations: The cost of delivering to an apartment in New York City is the same whether FreshDirect is delivering one box or 10 boxes—and very often it is 10 boxes, which is, of course, much more profitable. The company has also done a great job amassing a database, says Winer, of customer orders that help FreshDirect develop a better understanding of what individual people want and the quantities they buy.
FreshDirect's 4-Minute Meal was a "terrific differentiator" that capitalizes on the fact more people are eating at home, according to Winer. He believes the prices are fair and the food is great, and he likes the idea of using celebrity chefs. Winer also thinks the feature on the Web site that reminds customers of things they bought recently is a great vehicle for stimulating additional purchases.
Different Delivery System
Winer is more skeptical about FreshDirect's plan to put vending machines in corporate locations. "I'm a little bit more suspicious of whether that will be successful," he says. "Vending machines require a different business model—they break down, and they can be damaged. I really question why they decided to get into that, and time will tell whether that is successful."
As FreshDirect continues to navigate the recession, it faces various challenges, Winer says. In a recession, people are concerned that a Web-based company will have higher prices than others. So FreshDirect has to work harder, he says, on maintaining the image that it is not more expensive, so it can win repeat purchases. "It's one thing to get people to buy once in a while—it's another to get them to buy more often."
FreshDirect also faces challenges shared by Web grocers broadly. "How do you change habits and the nature of the way people shop?" says Winer. "Given that only 3% of all purchases are made online, there is still a long way to go."
McConnon is a staff editor for BusinessWeek in New York.
