Case 19: FreshDirect
Is It Really Fresh?*
With a bold promise on its website entry page, FreshDirect claimed, “Our food is fresh, our customers
are spoiled…. Order on the web today and get next-day delivery of the best food at the best price,
exactly the way you want it, with 100 percent satisfaction guaranteed.”1 However, recently many
consumers have questioned the freshness of the food delivered by FreshDirect. Since online shopping
does not give the chance for customers to feel and choose the products themselves, they must rely
completely on FreshDirect to select the food for them. This notion has not appealed to some customers.
Operating out of its production center in Long Island City, Queens, FreshDirect offers online grocery
shopping and delivery service to more than 300 zip codes in Manhattan, Queens, Brooklyn, Nassau
County, Riverdale, Westchester, select areas of Staten Island, New Jersey, and parts of Connecticut.
FreshDirect also offers pickup service at its Long Island City facility, as well as corporate service to
selected delivery zones in Manhattan and summer delivery service to the Hamptons on Long Island.
When it was launched in July 2001 by Joseph Fedele and Jason Ackerman, FreshDirect pronounced to
the New York area that it was “the new way to shop for food.” This was a bold statement given that the
previous decade had witnessed the demise of numerous other online grocery ventures. However, the
creators of FreshDirect were confident in the success of their business because their entire operation
had been designed to deliver one simple promise to grocery shoppers: “higher quality at lower prices.”
While this promise was an extremely common tagline used within and outside the grocery business,
FreshDirect had integrated numerous components into its system to give real meaning to these words.
Without a retail location, FreshDirect didn’t have to pay expensive rent for a retail space. To offer the
highest quality products to its customers, FreshDirect had created a state-of-the-art production center
and staffed it with expert personnel. The 300,000-square-foot production facility located in Long Island
City was composed of 12 separate temperature zones, ensuring that each piece of food was kept at its
optimal temperature for ripening or preservation—kept colder and cleaner than in any retail
environment.
Further quality management was achieved by an SAP manufacturing software system that controlled
every detail of the facility’s operations. All of the thermometers, scales, and conveyor belts within the
facility were connected to a central command center. Each specific setting was programmed into the
system by an expert from the corresponding department, including everything from the ideal
temperature for ripening a cantaloupe to the amount of flour that went into French bread. The system
was also equipped with a monitoring alarm that alerted staff to any deviation from the programmed
settings.
Another quality control element that had been made an integral part of the FreshDirect facility was an
extremely high standard for cleanliness, health, and safety. The facility itself was kept immaculately
clean, and all food-preparation areas and equipment were bathed in antiseptic foam at the end of each
day. Incoming and outgoing food was tested in FreshDirect’s in-house laboratory, which ensured that
the facility adhered to USDA guidelines and the Hazard Analysis and Critical Control Point food safety
system and that all food passing through FreshDirect met the company’s high safety standards.2
System efficiency had been the key to FreshDirect’s ability to offer its high-quality products at such low
prices. FreshDirect’s biggest operational design component for reducing costs had been the complete
elimination of the middleman. Instead of going through an intermediary, both fresh and dry products
were ordered from individual growers and producers and shipped directly to FreshDirect’s production
center, where FreshDirect’s expert staff prepared them for purchase. In addition, FreshDirect did not
accept any slotting allowances.3 This unique relationship with growers and producers allowed
FreshDirect to enjoy reduced purchase prices from its suppliers, enabling it to pass even greater savings
on to its customers.
Each department of the facility, including the coffee roaster, butcher, and bakery, was staffed by
carefully selected experts, enabling FreshDirect to offer premium fresh coffees (roasted on site), pastries
and breads (baked on site), deli, cheese, meats (roast beef dry-aged on site), and seafood. Perishable
produce was FreshDirect’s specialty—by buying locally as much as possible and using the best sources of
the season, it was able to bring food the shortest distance from farms, dairies, and fisheries to the
customer’s table.
FreshDirect catered to the tastes of its Manhattan clientele by offering a full line of heat-and-serve
meals prepared in the FreshDirect kitchen by New York executive chef Michael Stark (formerly of
Tribeca Grill) and his team. Partnering with Chef Terrance Brennan of New York’s French-Mediterranean
restaurant Picholine, FreshDirect also sold “restaurant-worthy” four-minute meals. Made from raw
ingredients delivered in a “steam valve system” package, these complete meals were not frozen but
were delivered ready to finish cooking in a microwave.
The proximity of FreshDirect’s processing facility to its Manhattan customer base was also a critical
factor in its cost-effective operational design. The processing center’s location in Long Island City put
approximately 4 million people within a 10-mile radius of the FreshDirect facility, allowing the firm to
deliver a large number of orders in a short amount of time.4 Further, cost controls had been
implemented through FreshDirect’s order and delivery protocols. Products in each individual order were
packed in boxes, separated by type of item (meat, seafood, and produce packed together; dairy, deli,
cheese, coffee, and tea packed together; grocery, specialty and nonrefrigerated products packed
together), and placed on a computerized conveyor system to be sorted, assembled, and packed into a
refrigerated truck for delivery.
As of 2011, orders had to be a minimum of $30, with a delivery charge between $5.49 and $6.79 per
order, depending on the order dollar amount and delivery location. Delivery was made by one of
FreshDirect’s own trucks and was available only during a prearranged two-hour window from 6:30 a.m.
to 11:30 p.m. from Sunday to Friday and from 6:30 a.m. to 10 p.m. on Saturday.
Competing with other online grocers, specialty gourmet/gourmand stores in Manhattan, and high-end
chain supermarkets like Whole Foods, Trader Joe’s, and Fairway, FreshDirect was trying to woo the
sophisticated New Yorker with an offer of quality, delivered door-to-door, at a price more attractive
than others in the neighborhood. Operating in the black for the first time in 2005,5 by choosing to
remain a private company and expanding gradually, FreshDirect’s owners hoped to turn a daily profit,
steadily recovering the estimated $60 million start-up costs, silencing critics, and winning converts.6
reshDirect was launched in July 2001. Cofounder and former chief executive officer Joseph Fedele was
able to bring a wealth of experience in New York City’s food industry to FreshDirect. In 1993 he
cofounded Fairway Uptown, a 35,000-foot supermarket located on West 133 Street in Harlem. Many
critics originally questioned the success of a store in that location, but Fairway’s low prices and quality
selection of produce and meats made it a hit with neighborhood residents, as well as many downtown
and suburban commuters.
Vice Chairman and Chief Financial Officer Jason Ackerman had gained exposure to the grocery industry
as an investment banker with Donaldson Lufkin & Jenrette, where he specialized in supermarket
mergers and acquisitions. Fedele and Ackerman first explored the idea of starting a large chain of freshfood stores, but they realized maintaining a high degree of quality would be impossible with a large
enterprise. As an alternative, they elected to pursue a business that incorporated online shopping with
central distribution. Using the failure of Webvan, the dot-com delivery service that ran through $830
million in five years of rapid expansion, as their example of what not to do, Fedele and Ackerman
planned to start slow, use off-the-shelf software and an automated delivery system, and pay attention
to details such as forming relationships with key suppliers and micromanaging quality control.7
FreshDirect acquired the bulk of its $100 million investment from several private sources, with a small
contribution coming from the State of New York. By locating FreshDirect’s distribution center within the
state border and promising to create at least 300 new permanent, full-time, private-sector jobs in the
state, FreshDirect became eligible for a $500,000 training grant from the Empire State Development
Jobs Now Program. As its name implied, the purpose of the Jobs Now program was to create new,
immediate job opportunities for New Yorkers.
CEO Successions
Although the press was mostly positive about FreshDirect’s opportunities, growth and operational
challenges remained. In the words of an ex-senior executive of FreshDirect, “The major problem seems
to be constant change in Senior Management. I think they are now on their 4th CEO.”8 Actually, the
company is currently on its fifth CEO in eight years of operation. FreshDirect cofounder Joseph Fedele
had remained CEO until January 2004, when cofounder Jason Ackerman succeeded him in that position.
Since then, FreshDirect has experienced multiple CEO changes. Jason Ackerman stayed as CEO of
FreshDirect for a little over seven months, until Dean Furbush succeeded him in that position in
September 2004. Ackerman remained vice chairman and chief financial officer. The tenure of Dean
Furbush lasted a little over two years. Steve Michaelson, president since 2004, replaced Furbush as the
CEO of FreshDirect in early 2007.9 In 2008 Michaelson left for another firm, and FreshDirect’s chairman
of the board, Richard Braddock, expanded his role in the firm and took over as CEO. Braddock said, “I
chose to increase my involvement with the company because I love the business and I think it has great
growth potential.” Braddock previously worked at private equity firm MidOcean Partners and travel
services retailer Priceline.com, where he also served as chairman and CEO.
While business started out relatively slow, FreshDirect had hoped to capture around 5 percent of the
New York City grocery market. The company was originally slated for availability citywide by the end of
2002. However, to maintain its superior service and product quality, FreshDirect had chosen to slowly
expand its service area. By the spring of 2011, FreshDirect had delivery available to selected zip codes
and neighborhoods throughout Manhattan and as far away as Westchester, Connecticut, New Jersey,
and the Hamptons on Long Island (in the summer only).
The company had employed a relatively low-cost marketing approach, which originally consisted mainly
of billboards, public relations, and word of mouth to promote its products and services. FreshDirect
hired Trumpet, an ad agency that promoted FreshDirect as a better way to shop by emphasizing the
problems associated with traditional grocery shopping. For example, one commercial stressed the
unsanitary conditions in a supermarket by showing a grocery shopper bending over a barrel of olives as
she sneezed, getting an olive stuck in her nose, and then blowing it back into the barrel. The
advertisement ended with the question “Where’s your food been?” Another ad showed a checkout clerk
morph into an armed robber, demand money from the customer, and then morph back into a friendly
checkout clerk once the money was received. The ad urged viewers to “stop getting robbed at the
grocery store.”11 As of 2011, FreshDirect enlisted celebrity endorsements from New York City
personalities such as film director Spike Lee, actress Cynthia Nixon, former mayor Ed Koch, supermodel
Paulina Porizkova, and chef Bobby Flay.12 Recently the company planned to change its marketing
strategy by launching a new testimonial-based campaign using actual customers, rather than celebrities.
FreshDirect was number 70 in the Internet Retailer Top 500 Guide. In 2010 the company claimed
revenue of more than $250 million, an increase of $20 million from the previous year and had grown its
customer base in the range of 20 percent to 25 percent.13
Operating Strategy
FreshDirect’s operating strategy had employed a make-to-order philosophy, eliminating the middleman
in order to create an efficient supply chain.14 By focusing its energy on providing produce, meat,
seafood, baked goods, and coffees that were made to the customer’s specific order, FreshDirect offered
its customers an alternative to the standardized cuts and choices available at most brick-and-mortar
grocery stores. This strategy had created a business model that was unique within the grocery business
community. A typical grocery store carried about 25,000 packaged goods, which accounted for around
50 percent of its sales, and about 2,200 perishable products, which accounted for the other 50 percent
of sales. In contrast, FreshDirect offered around 5,000 perishable products, accounting for about 75
percent of its sales, but only around 3,000 packaged goods, which comprised the remaining 25 percent
of sales.15
While this stocking pattern enabled a greater array of fresh foods, it limited the number of brands and
available sizes of packaged goods, such as cereal, crackers, and laundry detergent. However, FreshDirect
believed customers would accept a more limited packaged-good selection in order to get lower prices,
as evidenced in the success of wholesale grocery stores, which offered bulk sales of limited items. Jason
Ackerman identified the ideal FreshDirect customers as those who bought their bulk staples from Costco
on a monthly basis and bought everything else from FreshDirect on a weekly basis.
FreshDirect’s website not only offered an abundance of products to choose from but also provided a
broad spectrum of information on the food that was sold and the manner in which it was sold (see
Exhibit 1). Web surfers could take a pictorial tour of the FreshDirect facility; get background information
on the experts who managed each department; get nutritional information on food items; compare
produce or cheese based on taste, price, and usage; specify the thickness of meat or seafood orders and
opt for one of several marinades or rubs (see Exhibit 2); search for the right kind of coffee based on
taste preferences; and read nutritional information for a variety of fully prepared meals. A large
selection of recipes was available depending on the items chosen.
Exhibit 1: FreshDirect Website
Exhibit 2: Example of FreshDirect Seafood Selection
or example, if you wanted to purchase chicken, you were first asked to choose from breasts and cutlets,
cubes and strips, ground, legs and thighs, specialty parts, split and quartered, whole, or wings. Once
your selection was made—let’s says you chose breasts and cutlets—you were given further options
based on your preference for skin, bone, and thickness. The final selection step offered you a choice of
rubs and marinades, including teriyaki, sweet and sour, garlic rosemary, poultry seasoning, lemon herb
rub, and salt-and-pepper rub. Throughout, the pages offered nutritional profiles of each cut of meat as
well as tips for preparation and storage.
FreshDirect employed several different delivery models. Customers within the city were attracted to the
FreshDirect service because it eliminated the need to carry groceries for possibly a substantial distance
from the closest grocery store or to deal with trying to park a car near their apartment to unload their
purchases. Orders made by customers within the city were delivered directly to their homes by a
FreshDirect truck during a prearranged two-hour delivery window.
Suburban customers were served in a slightly different manner. Many suburban customers worked at
corporations in the tristate area that could arrange for depot drop-off in the office parking lot, creating a
central delivery station. FreshDirect would send a refrigerated truck, large enough to hold 500 orders, to
these key spots during designated periods of time. Suburbanites could then exit their office building, go
to their cars, swing by the FreshDirect truck, pick up their order, and head home. FreshDirect could also
provide delivery to the parking lot of football or concert events to provide for tailgate or picnic needs. In
addition to providing delivery, FreshDirect allowed customers to pick up their orders directly from the
processing center. Orders were ready at the pickup desk five to ten minutes after they were called in.
Business customers in Manhattan could also order for delivery at the office. Chef-prepared breakfast
and luncheon catering platters and restaurant-quality individual meals were available for business
meetings and upscale events. FreshDirect provided dedicated corporate account managers and
customer service representatives for corporate clients; however, FreshDirect only provided delivery, not
set-up and platter-arrangement services. The corporate delivery minimum order was $50, and delivery
costs were $14.99 (see Exhibit 3).
The Retail Grocery Industry
In the United States in 2009, according to the U.S. Department of Commerce, supermarket chains made
almost $556 billion in sales. The typical supermarket store carried an average of 48,750 items, averaged
just around 46,235 square feet in size, and averaged just over $18 million in sales annually.17 The top-10
supermarket chains in the United States commanded a large amount of the total grocery industry
business (see Exhibit 4).
Exhibit 4: Top-10 North American Food Retailers
Source: Supermarket News. 2011. supermarketnews.com/profiles/top75/2011/.
The supermarket business had traditionally been a low-margin business with net profits of only 1 to 2
percent of revenues. Store profits depended heavily on creating a high volume of customer traffic and
rapid inventory turnover, especially for perishables such as produce and fresh meat. Competitors had to
operate efficiently to make money, so tight control of labor costs and product spoilage was essential.
Online grocery retailers, like FreshDirect—because of the flexibility of information control, automated
order fulfillment, and reduced real estate costs—could potentially have operating margins of up to 10
percent, rather than the 3 to 4 percent of traditional supermarkets.18 Because capital investment costs
were modest—involving mainly the construction of distribution centers and stores—it was not unusual
for supermarket chains to realize 15 to 20 percent returns on invested capital.
The Online Grocery Segment
Total online grocery shopping sales were estimated to be about $8.4 billion in 2010. However, this
number accounts for less than 2 percent of total grocery sales. Online grocery shopping had been slow
to catch on, and industry newcomers had encountered high start-up and operating costs. Sales volumes
and profit margins remained too small to cover the high costs. The problem, according to industry
analysts, was that consumers had been largely disappointed in the service, selection, and prices they
had gotten from industry members. This, coupled with the extensive investment needed in
warehousing, fulfillment, and inventory control, meant that the “pure play” e-grocery business models
were risky. There was a belief that better success would come from traditional grocery retailers that
chose to venture online.19
However, some analysts expected online grocery sales to grow at a rapid pace as companies improved
their service and selection, personal computer penetration of households rose, and consumers became
more accustomed to making purchases online.20 An article in Computer Bits examined the customer
base for online grocers, looking specifically at the types of consumers who would be likely to shop online
and the kinds of home computer systems that were required for online shopping. An Andersen
Consulting report identified six major types of online shoppers (see Exhibit 5), and Braddock predicted
that online grocery sales could account for as much as 20 percent or more of total grocery sales within
next 10 years.21 A MARC Group study concluded, “Consumers who buy groceries online are likely to be
more loyal to their electronic supermarkets, spend more per store ‘visit,’ and take greater advantage of
coupons and premiums than traditional customers.”22 By 2014, online grocery sales have been
estimated to reach a value of $13.5 billion.
One of the problems with online grocery shopping was that consumers were extremely price sensitive
when it came to buying groceries, and the prices of many online grocers were above those at
supermarkets. Shoppers, in many cases, were unwilling to pay extra to online grocers for the
convenience of home delivery. Consumer price sensitivity meant that online grocers had to achieve a
cost structure that would allow them to (1) price competitively, (2) cover the cost of selecting items in
the store and delivering individual grocery orders, and (3) have sufficient margins to earn attractive
returns on their investment. Some analysts estimated that to be successful, online grocers had to do 10
times the volume of a traditional grocer.24
Potential Competitors in the Online Grocery Segment
When online grocers started appearing within the industry, many established brick-and-mortar grocers
began offering online shopping in an attempt to maintain and expand their customer base. Two basic
models were used for online order fulfillment: (1) to pick items from the shelves of existing stores within
the grocer’s chain, and (2) to build special warehouses dedicated to online orders. The demand for
home delivery of groceries had been increasing, but in many market areas the demand had not yet
reached a level that would justify the high cost of warehouses dedicated to fulfilling online orders.25
Safeway began an ambitious online grocery venture by establishing GroceryWorks, an online shopping
system that included a series of warehouses dedicated to filling online orders. Unfavorable returns
forced Safeway to reevaluate its system, and it eventually chose to form a partnership with Tesco, a UKbased grocer. Tesco filled its online orders from the shelves of local stores in close proximity to the
customer’s home. Safeway and Tesco worked together on GroceryWorks in Portland, Oregon, where
they received a positive initial response from customers.26
The craze over health food had created room in the grocery industry for organic food suppliers to enter
as an attractive substitute to traditional groceries. When asked what kept him up at night, FreshDirect’s
former CEO Dean Furbush said that Whole Foods or Trader Joe’s moving into a FreshDirect
neighborhood was his biggest threat, as that hurt FreshDirect the most.
Whole Foods, the Austin, Texas–based supermarket chain with the organic health food focus, had
already threatened FreshDirect’s sales in Manhattan. Trader Joe’s, another specialty food retailer, was
also opening a store in downtown Union Square, prime territory for FreshDirect.27 Although
commentators believed there was enough room for all, including the street farm markets, FreshDirect
focused on organic foods to respond to the threats of Whole Foods and other specialty food stores.28
With the shift among some customers to paying attention to local, sometimes organic, suppliers,
FreshDirect highlighted its support of and partnership with the local companies that provided produce,
poultry, fish, cheese, milk, eggs, and specialties such as wine (Exhibit 6). However, its efforts have been
inconsistent in that area. For example, in order to facilitate shoppers and checkout operators to
distinguish between organic and nonorganic produce, FreshDirect wraps organics in plastic, which in
itself is not organic. FreshDirect chairman Jeff Turner recognized that such an approach seemed
incongruous.
Rivals in the NYC Online Grocery Segment
YourGrocer.com
FreshDirect’s most geographically significant competitor in the online grocery industry was
YourGrocer.com (see Exhibits 7–10). YourGrocer was launched in New York City in 1998 with the goal of
being the leading online grocery service for the New York metropolitan area. By November 2001 the
company ran out of money and was forced to shut down. In the spring of 2002 new capital resources
were found, and the company reopened for business. However, the second time around, YourGrocer’s
approach was a little different.
Exhibit 8: Comparison of Prices for Selected Online Grocers
Exhibit 9: Yourgrocer.com Website
New YourGrocer focuses on providing three benefits that families in the area most value:
1. Easy ordering over the Internet or on the phone to save hours of thankless shopping. You can use
your last order as a starting point to save even more time.
2. Delivery right to the home or office, which eliminates the burden of lifting and transporting heavy and
bulky items each month.
3. Significant savings with everyday low prices—not short-duration specials—which reduce what you
pay for stock-up groceries and household supplies on average by 25% to 30% below local supermarkets.
Source: www.yourgrocer.com.
YourGrocer was created with a bulk-buying strategy, believing that customers would order large,
economical quantities of goods from the website and the company would make home deliveries in
company trucks. During YourGrocer’s first life, the ambitious business plan covered a large service area
and included the acquisition of another online grocery company, NYCGrocery.com.30 But the business
plan was modified in the second life. The company reduced the size of its staff, got rid of warehouses,
decided to rent instead of owning its delivery vans, and scaled down its delivery routes.31 Nassau
County and New Jersey were eliminated from the service area, leaving only Manhattan, the Bronx,
Brooklyn, Queens, Rockland, Westchester County, and Fairfield County (Connecticut).
YourGrocer offered a limited selection of items that could be purchased only in bulk. Deliveries were
made in varied time slots, depending on the customer’s location in the New York area. There was a $75
minimum order with a $9.95 delivery charge (see Exhibits 9 and 10).
Peapod
Founded in 1989 by brothers Andrew and Thomas Parkinson, Peapod (see Exhibits 11 and 12) was an
early pioneer in e-commerce, inventing an online home-shopping service for grocery items years ahead
of the commercial emergence of the Internet. With its tagline “Smart Shopping for Busy People,” the
company began providing consumers with a home-shopping experience in the early 1990s, going so far
as to install modems in customer homes to provide an online connection.
Exhibit 11: Peapod Website
Exhibit 12: Peapod Product Selection
From its founding in 1989 until 1998, the company’s business model involved filling customer orders by
forming alliances with traditional grocery retailers. The company chose a retail partner in each
geographic area where it operated and used the partner’s local network of retail stores to pick and pack
orders for delivery to customers. Peapod personnel would cruise the aisles of a partner’s stores,
selecting the items each customer ordered, pack and load them into Peapod vehicles, and then deliver
them to customers at prearranged times. Peapod charged customers a fee for its service and collected
fees from its retail supply partners for using their products in its online service. Over the next several
years, Peapod built delivery capabilities in eight market areas: Chicago; Columbus, Ohio; Boston; San
Francisco/San Jose; Houston, Dallas, and Austin, Texas; and Long Island, New York.
In 1997, faced with mounting losses despite growing revenues, Peapod management shifted to a new
order-fulfillment business model utilizing a local company-owned and -operated central distribution
warehouse to store, pick, and pack customer orders for delivery. By mid-1999 the company had opened
new distribution centers in three of the eight markets it served—Chicago, Long Island, and Boston—and
a fourth distribution center was under construction in San Francisco.
In the late spring of 2000, Peapod created a partnership with Royal Ahold, an international food
provider based in the Netherlands. At the time, Ahold operated five supermarket companies in the
United States: Stop & Shop, Tops Market, Giant-Landover, Giant-Carlisle, and BI-LO. In September 2000
Peapod acquired Streamline.com Inc.’s operations in Chicago and the Washington, D.C., markets and
announced that it planned to exit its markets in Columbus, Ohio, and Houston, Dallas, and Austin, Texas.
All of these moves were made as a part of Peapod’s strategic plan for growth and future profitability.
Under Peapod’s initial partnership agreement with Ahold, Peapod was to continue as a stand-alone
company, with Ahold supplying Peapod’s goods, services, and fast-pick fulfillment centers. However, in
July 2001 Ahold acquired all the outstanding shares of Peapod and merged Peapod into one of Ahold’s
subsidiaries.
Peapod provided online shopping and delivery service in many metropolitan areas, including Chicago,
Boston, Rhode Island, Connecticut, New Jersey, Long Island, and Washington, D.C. Peapod employed a
centralized distribution model in every market. As of 2011, Peapod has extended its delivery services to
Baltimore, Maryland, Virginia, Indiana, and southeastern Wisconsin. In large markets, orders are picked,
packed, loaded, and delivered from a freestanding centralized fulfillment center; in smaller markets,
Peapod established fast-pick centralized fulfillment centers adjacent to the facilities of retail partners.32
Peapod’s proprietary transportation routing system ensures on-time delivery and efficient truck and
driver utilization.
NetGrocer
NetGrocer.com was founded in 1996 and advertised itself as the first online grocer to sell nonperishable
items nationwide (see Exhibits 13 and 14). NetGrocer served all 48 continental U.S. states and the
District of Columbia and had special service to Alaska, Hawaii, APO, and FPO destinations. All customer
orders were filled in its single 120,000-square-foot warehouse in North Brunswick, New Jersey. Orders
were shipped by Federal Express and were guaranteed to reach any part of NetGrocer’s service area
within three to seven days.
Exhibit 13: Netgrocer.com Website
Exhibit 14: Netgrocer Shipping Charges
NetGrocer offered its customers a large selection of brand-name and specialty nonperishable items that
were difficult to find in a local supermarket. The key customer segment for NetGrocer’s services were
busy families, urban dwellers, special-needs groups (e.g., dieters, diabetics), and senior citizens.
Customers purportedly enjoyed the benefits of convenient online shopping from home 24 hours a day,
access to thousands of products, and delivery of their orders directly to their homes. Manufacturers also
benefited from NetGrocer, as they were able to distribute their products nationwide, rapidly, and easily.
Most Recent Challenges
As the online grocery retailing business continued to mature, all players needed to pay attention to
customer perception. Online retailing giant, Amazon.com had entered the dry-goods grocery delivery
business, posing a threat to other online retailers because of its existing loyal customer base and
legendary customer service. Creating a grocery section in 2006, Amazon offered over 10,000
nonperishable items, including “long-time staples, from Kellogg’s to Jiffy Pop.”33 The selection of dry
goods rather than perishables meant Amazon, unlike FreshDirect and Peapod, didn’t have to worry
about delivery costs on time- and climate-sensitive items. However, even Amazon suffered grocery
delivery failures, from out-of-stock problems to delivery glitches and website technical outages. Online
grocery retailers needed to “serve their online customers just like they would serve the customers who
come into their physical stores.”34
Even though FreshDirect had been able to woo local New Yorkers, gaining a Fast Company “Local Hero”
award, the company had to absorb “hundreds of thousands of dollars in parking tickets to get its
customers its orders within the delivery window.”35 And in 2007 New York City government proposed a
congestion charge for traffic entering Manhattan, adding to FreshDirect’s delivery expenses. The rising
cost of fuel was also a potential threat, even though FreshDirect included a fuel surcharge on orders,
based on the average retail price of gasoline.36 These expenses, coupled with penalties accrued from
parking violations, might have put significant pressure on FreshDirect’s ability to achieve its target profit
levels.
Environmental concerns also started to creep in as a major issue for FreshDirect. First, because of the
conveyor packing system at the processing facility, FreshDirect was forced to use lots of cardboard
boxes to deliver the groceries: Produce came in one box, dry goods in another, and a single tube of
toothpaste in its separate cardboard delivery container. Although FreshDirect had transitioned to the
use of 100 percent postconsumer recycled paper,37 the reusability of the cardboard boxes was limited
and the general public was increasingly becoming aware that their tax dollars were used to “collect and
dispose of the huge stacks of cardboards that FreshDirect’s customers leave in the trash.”38 As one
environmentally conscious consumer observed, “I was baffled by the number of boxes they used to pack
things. Groceries worth $40 came in five boxes. And after I unpacked, I had to discard the boxes. There
was no system of returning them to FreshDirect to be recycled.”39
A second issue that environmentally conscious consumers became concerned about was the additional
exhaust fumes that FreshDirect trucks contributed to the urban atmosphere.40 Third, FreshDirect trucks
double-parked in busy city streets had only made the traffic congestion problems worse. “It’s probably
no exaggeration to say that FreshDirect has built its financial success on its ability to fob off its social and
environmental costs on the city as a whole.”41 Lastly, some city dwellers even expressed concern about
FreshDirect’s adverse effect on the overall makeup of their neighborhoods: “It is not just the impact
they have on congestion, pollution, space, etc., but their very adverse impact on the best of businesses
in neighborhoods that they can undersell because of their externalized costs. It is these small
businesses, farmers markets and local grocery stores, that FreshDirect undercuts, that are some of the
best businesses for supporting and preserving our walkable, diverse and safe neighborhoods.”
FreshDirect served only selected neighborhoods within New York City. As the neighborhood selection
process was highly arbitrary, many people who lived in neighborhoods that FreshDirect did not serve
had started to accuse the company of discrimination. As one customer put it, “FreshDirect is the most
convenient way to shop for groceries in NYC … unless you live in a Public Housing building—they won’t
deliver to you!”43 Others echoed similar concerns in terms of FreshDirect’s decision to not serve specific
neighborhoods: “These are neighborhoods that FreshDirect deems underserved, or in plain terms … not
worth the bother.”44
Some of the recent challenges FreshDirect faced were union related. FreshDirect’s 500 truck drivers
recently joined Local 348 of the United Food and Commercial Workers Union. Some of the reasons cited
by the workers for this move were that “they made us work 12 and 14 hours a day, then … when some
of us refused we were suspended for three days without pay.” Also, the workers complained that the
wages were pretty low as compared to wages at other grocery chains in New York. According to the
workers, the initial beginning salaries at FreshDirect were just higher than $7, with the average per-hour
pay being around $8.50. Workers also claimed that the health benefit premiums were high and not
easily affordable. A firm spokesman replied to these complaints that “we have incredibly generous
benefits that are more than competitive.”45
Just a few days before Christmas in December 2007, FreshDirect asked its 900 plant workers to provide
legal papers proving their immigration status.46 As a result, many workers left immediately, some of
whom had been associated with FreshDirect for 5 to 6 years.47 Surprisingly, the majority of the
workforce rejected the proposal of unionizing (around 80 percent voting against unionization). However,
the number of workers voting was only 530, not 900, because so many employees had left the company
after the immigration-status audit was announced.48 FreshDirect was successful in suppressing the
union revolt, but remaining workers were demoralized and the company’s image was tainted among its
customers.49
Aside from the labor challenges, FreshDirect was working hard to woo its customers. FreshDirect started
a line of four-minute meals. These fresh meals were packed in microwavable containers, and, as the
name implies, they could be ready to eat after four minutes in a microwave oven.
FreshDirect had teamed up with some well-known Manhattan restaurants and chefs to introduce the
four-minute meal concept. The lineup included Rosa Mexicano for Mexican cuisine,50 chef Floyd
Cardoz’s Tabla for Indian cuisine,51 chef Tina Bourbeau’s Presto Italiano line of Italian cuisine, and
several others. Another promotion was FreshDirect’s “Valentine’s Dinner for Two,” which allowed
customers to “prepare an easy and romantic restaurant-quality meal for a special someone in the
comfort of their own homes.” The menu had a variety of options, including appetizers, desserts, entrées,
wines, champagnes, and so on. This menu came in the price range of $69 to $99, and the meal needed
less than 20 minutes of cooking time.52
FreshDirect expanded its delivery options with a fixed-price unlimited-delivery program in addition to
the standard per-delivery fee program, which cost $5.49 to $6.79 depending on location. The unlimiteddelivery program gave customers an unlimited number of deliveries for a set fee of $59 for six months or
$99 per year.53 FreshDirect also reduced its minimum order to $30 from $50 in late 2008. Another
innovation was the company’s online customer-created shopping list. Customers could create and save
their own shopping lists, such as a weekly list, mother-in-law list, and party list. In addition, the company
offered its own tailored lists, such as Simple Suppers, Pantry Basics, Top 20 Most Popular FreshDirect
Items, Healthy Snacks, and Entertaining Essentials, to help customers create lists of their own.
Neither labor strife nor economic downturn had stopped FreshDirect’s growth. Looking into the future,
there was speculation that FreshDirect might want to “seek public funding to underwrite growth
possibilities.”55 Since Whole Foods Market’s acquisition of Wild Oats Markets, analysts felt that some
private players in the New York market, such as FreshDirect, might consider pursuing investment capital
through an initial public offering.
Another major issue for FreshDirect was their customers’ concerns about how fresh the produce and
meats really were. One of the biggest obstacles to the growth of online ordering of groceries had been
the inability to view and touch food, particularly fresh produce and meat. Online customers couldn’t
pick up and thump a melon or peel back the leaves on a head of Romaine lettuce to check for freshness
the same way they could in the grocery store. FreshDirect received numerous inputs from consumers
which basically stated, “I can’t see, touch and smell the products. I have to rely on you.” This lack of
control over identifying the freshness of the food caused major concerns for the customers. The
company recognized the problem and spun this negative aspect of online shopping into a positive one
by creating a food-quality rating system. Consumer feedback jump-started a new way of doing business
for FreshDirect.56
In order to accommodate online food shoppers who wanted more product detail, FreshDirect created its
own food-quality rating system to resolve this challenge. The company introduced a Daily Produce
Rating System that ranked the quality of fruits and vegetables available for delivery the next day. The
five-star rating system gives shoppers “a foolproof way to ensure that the ripest fruits and crunchiest
veggies are consistently delivered to their doorsteps,” as advertised in the company’s website. The Daily
Produce Rating System is based on a daily inspection of all produce in stock by a quality assurance team.
Rating criteria include taste, color, firmness, and ripeness. Rankings are based on an easy ratings scale:
• five stars signify “never better, the best we’ve seen”;
• four stars indicate “great/delicious”;
• three stars mean “good/reliably decent”;
• two stars indicate “average/inconsistent quality/generally OK”; and
• one star signals “below average/expect wide inconsistency in quality/probably out of season.”
Results are updated each morning on FreshDirect’s website to let customers know which fruits and
veggies are the best bets for deliveries to be received on the following day. FreshDirect also offers the
same five-star rating service for seafood, and some 50 percent to 70 percent of its customers have used
the feature.58 The system aims to simulate the in-store shopping experience, allowing the grocers to
showcase their best stuff and customers to decide what looks good. “Not everyone is an expert on the
seasonality of a fruit or vegetable, so this system takes the guesswork out of choosing the best available
items,” said FreshDirect chief marketing officer Steve Druckman. “Each of the buyers and managers who
rate the produce have years on the job, so they have great expertise. I am not aware of any other online
or conventional grocer that’s developing a system such as this.”
owever, the strategy came with a big risk: to gain customers’ trust, FreshDirect would have to
acknowledge that not every item it stocked was picture perfect every day. Not everyone at the company
was enthusiastic about the idea. Many feared backlash from the consumers about FreshDirect’s
products not always being top quality. “Was it scary? Yeah!” recalled Glenn Walsh, the produce
manager. “I thought it was insane in the beginning.”59
Despite the risk, the company claims that the rating system has changed consumer buying patterns.
Around 70 percent of customers have said they purchased something they wouldn’t have if it wasn’t for
the rating system. Druckman asserted, “One hundred percent of customers changed buying patterns.
The rating system works. If we put something out like black seedless grapes or golden pineapples with
four stars, we’ll sell twice as many of those because of their rating than otherwise.”60
Rick Braddock also decided to upgrade FreshDirect’s website, using the company’s internal database to
profile customers and serve a customized online experience. For example, the site’s software could now
analyze order patterns, reminding customers of their favorite products and suggesting other items they
might like, a marketing tool that had worked well for Netflix and Amazon. In addition, the database
recognizes whether a visiting customer is a new, infrequent, lapsed, or loyal customer—and serves
appropriate messages and ads.
It remains to be seen whether FreshDirect can survive all the changes. Given that only 2 percent of all
purchases are made online, FreshDirect still has a long way to go.