FreshDirect's business model and strategic challenges in online grocery delivery

Fresh Direct

Company Overview/Key Strategic Issues

FreshDirect is an internet-based direct sales grocery marketer that operates in the greater New York Metropolitan area. The retail grocery industry is the operating area but the company offers a remarkably unique model which offers more fresh food than prepackaged, and therefore serves a customer base who may do bulk shopping monthly but needs to supplement this weekly with fresh produce, meats and other perishable goods as well as at least a limited amount of prepackaged foods. The company was launched in the summer of 2001 and operates from a production center in Long Island City, which affords the company a 4 million person potential customer base within a 10-mile radius. (Pearce & Robinson, 2005, p. 35-2) Some of the major issues with regard to FreshDirect is the ability of this service to demonstrate growth in a niche market (online grocery delivery service) that has seen many start up failures. (Kummer, 2006, p. 152) FreshDirect from the beginning chose to offer a service that was very different from many like it, in that they chose to eliminate the middle man and as much as possible buy directly from the grower/producer.

The company demonstrates a rigid flexibility that seems to be working, even as other online grocers are failing. FreshDirect offers individualized service to customers and markets to new customers with a free $50 on first purchase of fresh foods. Delivery fees are also fixed at 3.95 which far undermines the cost of driving, parking and hassle that is involved in grocery shopping in large metropolitan areas. The company also offers limited delivery times, so distribution will not interfere with peak traffic times. Initial customer base was expected to be at or near 100,000 by the end of the first year of operations, and yet the company only reached about 40,000. The company also expected to expand regional services in a two-year period but was unable to do so, and has now chosen a slow growth model. (Pearce & Robinson, 2005, p. 35-1-4) Lastly, FreshDirect demonstrates a strategic advantage in that it employees state of the art facilitates that are controlled from beginning to end by computerized systems that control everything from product recipes (i.e. raw goods delivery) to the heat or cooling system. (Pearce & Robinson, 2005, p. 35-1-4)

Analysis of Data

The major competitors of FreshDirect are brick and mortar supermarkets who offer physical and visual ability of the customer to purchase in many sizes and brands. The emphasis of most grocery stores according to Pearce & Robinson is upon the inclusion of prepackaged goods (25,000) which accounts for 50% of sales, and the remainder fresh products (2,200) which constitutes the other 50% of sales. While FreshDirect relies much more heavily on fresh foods, including meat, produce, seafood, baked goods and coffee (5,000) to generate 75% of it sales and prepackaged goods (3,000) to make up the other 25% of sales. The idea being that people will choose to purchase large quantities of prepackaged goods elsewhere, say monthly and then shop with FreshDirect on a weakly basis, which reduces the number of impulse purchases they make at brick and mortar stores and constitutes what creators believed would be a competitive edge. (Pearce & Robinson, 2005, p. 35-3) the supermarket set constitutes serious competition as the major chains hold an impressive 44.2% of the market for products purchased in such stores. (Pearce & Robinson, 2005, p. 35-5) Other more direct competitors are delivery services who provide similar services to customers as FreshDirect. The main competitors are YourGrocer, Peapod and NetGrocer, as they cover the market area that FreshDirect Serves and offer similar services, yet they all fulfil a bit of a nich market that is very different than FreshDirect. YourGrocer offers bulk orders of prepackaged goods. Peapod Is a partnership with Giant Foods and Stop & Shop, so items are pulled from local store shelves. NetGrocer offers only non-perishable foods. Prices at FreshDirect are also lower comparatively on many items as the middle man, especially on fresh products is eliminated. (Pearce & Robinson, 2005, p. 35-9) This emphasis on niche marketing gives FreshDirect a competitive advantage as it creates a novel market for consumers specifically seeking fresh and custom purchases, but does not directly compete with as many stores. Another recent trend that may affect FreshDirect is the online market creations by existing brick and mortar stores, such as Safeway, Albertson's and now Wal-Mart. (LeClair, 2002, NP) the business model of FreshDirect seems to match the existing consumer desire for goods, as is seen in the following table, as FresDirect offers more food than any other product and only limited amounts of secondary and branded prepackaged goods.

Table 2: Groceries Purchased Online

Source: Food Marketing Institute, 2000.

Most Popular Grocery Category Purchased Online

Percentage

Food

Health and beauty care

Vitamins, herbal remedies and beauty aids

Household cleaners

Pet supplies

Kempiak & Fox, July 2006, NP)

An additional table offers other pertinent information comparisons regarding niche marketing differences as they compare to long established deliver/shipping companies that have online presence. (Johnson, Killgallon & Lockart, 2000, p. 2)

FreshDirect will likely remain a strong competitor regionally, as long as marketing stays strong and interest in the niche of fresh customized choices for those who wish to shop less frequently in grocery stores. The regional market of NYC is a strong market for FreshDirect as the hassle surrounding shopping can be significant as can the time resources that are demanded from it.

SWOT Analysis:

Strengths: consumer direct distribution, high quality ratings and standards, innovative marketing plan, strong leadership, fundamentally strong expert teams of employees,(Gonzales, September 28, 2007, NP) high quality in warehouse environments that regulate conditions (unlike retail), customization of products offered to customers. Weakness: Employee friction based on unionization controversy, high cost of production and quality standards,

Opportunities: slow steady growth, marketing to broader users, expanded web awareness and use, employee re-motivation

Threats: competition with established brick and mortar stores (i.e. more brands and product sizes) establishing competitive markets, brick and mortar expansion, increased fuel prices and domino effect on goods, emerging competitors

Recommendations

The most important recommendation for this company would be to do a very thorough damage control campaign regarding the employment situation and maintain quality in the process. This market is precarious, as has been seen by the several early failures in the online grocery game and losses must be kept to the minimum while convenience marketing continues to be a key to success. The target should be to maintain customer base, fight attrition caused by the one time $50 dollar offer and/or the employment fairness situation.

Post Audit Analysis

Employee auditing is essential as each retained employee must have an understandable job description that is known to management and new employees must understand their role as well. There is not question that this company will remain in business but a good exit strategy would be to build partnership connections with other retail outlets for distribution of FreshDirect brand products and possibly build a consultation service to assist other market players in developing the quality systems that FreshDirect has maintained.