Battling Congestion

Online grocer FreshDirect Inc. is taking a line from "New York, New York:" "If I can make it there, I`ll make it anywhere."

"This is the best and most challenging food market in the country, and we are going to continue to do things the right way here," says CEO Dean Furbush. "There is no better testing ground for our business model than New York City and we are succeeding."

FreshDirect so far is proving that it can make it in New York, the largest, most demanding and most congested market in the U.S. From a start-up in 1999, the company hit $125 million in sales last year and expects to reach at least $150 million this year. And it is closing in on profitability, says Furbush, who is also chief operating officer.

A regional franchise

Now, as the company makes the transition from Internet start-up to established web grocer and food services retailer, FreshDirect is beginning to build a regional web grocery franchise that`s gaining acceptance with consumers--it has a base of 200,000 in Manhattan--and is expanding into corporate sales.

By the end of this year, FreshDirect will have filled more than 2 million orders. And despite the emergence of competition in the form of Peapod, the oldest web grocer which is targeting Long Island and other New York suburbs for expansion, FreshDirect expects to grow next year to around $200 million in sales.

To stay on course and meet the new challenges of growth and competition, FreshDirect is promoting and bringing in new senior management, including a new CEO and president, expanding into New York`s potentially lucrative corporate market and building on its product inventory of more than 8,000 SKUs.

The ingredients to the company`s long-term success will be implementing even more refinements of FreshDirect`s customer service and supply chain model, built to process 1,000 fresh food and grocery orders per hour or as many as 10,000 per day, and meeting the delivery needs of diverse--and demanding--New York food buyers.

"We shorten the supply chain by purchasing fresh foods direct from the source and processing orders in a state-of-the art manufacturing facility using a very sophisticated batch manufacturing process," Furbush says. "This process improves quality, lowers costs and provides maximum customization for each customer."

The 3-year plan

Launched in 1999 by Joe Fedele, a New York grocery retailing executive, and Wall Street investment banker Jason Ackerman, FreshDirect didn`t deliver its first order until July 2002, preferring instead to raise capital and develop a 300,000-square-foot storage and distribution center in Long Island City that today features nearly three miles of conveyor belts and 12 different temperature zones built to handle diverse products from seafood to produce.

Rather than race out of the business development blocks and fail like other web grocers such as ill-fated Webvan Group Inc., FreshDirect spent nearly three years planning and refining an e-commerce model that focuses on sophisticated Internet order taking and delivering fresh items at extremely competitive prices in New York City, a $24 billion food services marketplace.

Such a long gestation period was made possible by several factors, including raising more than $100 million through a network of large private investors such as AIG Global Investment Corp., Canyon Partners, CIBC Capital Partners and Mercantile Capital Partners, and through government incentives such as a $500,000 training grant from the state of New York`s Empire State Development`s Jobs Now Program.

When FreshDirect began its initial search for capital, some naysayers doubted the company`s business plan and approach to online food retailing. At the time FreshDirect began, competitors such as Webvan were raising as much as $500 million and spending it on large-scale national operations, which depended on national suppliers, an expensive supply chain with as many as 500,000 different products and regional distribution partners.

But Fedele and Ackerman, who remains FreshDirect`s chairman and chief financial officer, believed that web grocery retailing was a business best operated on a local level using advanced fulfillment technology and a network of carefully picked local suppliers who deliver fresh products daily. "They helped pioneer and prove the model many of the more successful web grocery companies rely on today," says Willard R. Bishop Jr., president of Willard Bishop Consulting, a Barrington, Ill., food services and retailing consulting firm. "Their value proposition is running a very efficient supply chain that relies on a local supply system, aggressive pricing and great fulfillment."

Pricing and flexibility

The key to the company`s initial success from a marketing and customer service perspective is pricing and an extremely flexible delivery system that takes into account the fluctuating traffic conditions, ongoing congestion and cramped living and office space in New York boroughs.

In the online food and beverage business, where Forrester Research Inc. forecasts 2004 annual sales will reach $5.1 billion, some web grocers build their business around national suppliers and regional distribution centers, while others provide the online order-taking, transaction processing and delivery services, but depend upon a regional grocery store chain for their supply of meat, produce, canned goods and other items.

But the latest model being implemented by companies such as SimonDelivers in Minneapolis and FreshDirect is to line up regional and local suppliers and build out supply chain and delivery systems in ways that entice customers with lower prices and faster order taking.

FreshDirect, for instance, offers pricing it says is 10% to 35% below traditional retail prices and promises that, in many cases, orders placed by midnight on weekdays or 9 p.m. on weekends can be scheduled for next-day delivery. "People want convenience but don`t really want to pay a premium for it and they also want low prices," Furbush says. "Quality is the key to customer satisfaction and FreshDirect is the only food service that gives people better quality products at better prices with convenient delivery."

To ensure timely delivery in Manhattan and elsewhere, FreshDirect has a fleet of more than 100 delivery trucks and frequently adjusts the number of drivers and pedestrian delivery employees needed to deliver orders on time.

Rain and diplomats

On a September weekend as the remnants of Hurricane Ivan dumped up to six inches of rain and New York prepared to host 90 foreign heads of state at a United Nations summit, FreshDirect altered its fulfillment program to ensure that orders were shipped in a timely manner. In addition to putting as many as three delivery employees in each truck, FreshDirect also had as many as eight additional employees waiting at predetermined locations to take orders off the trucks and deliver them on foot.

If an order was running late, FreshDirect, which has its logistics program tied into its customer service program, placed calls to customers informing them of the new expected delivery window. "We increased the number of employees taking orders off the truck and delivering them on foot during the Republican National Convention if certain streets were blocked off or hard to get to," Furbush says. "That`s a good example of why New York City is a unique food market and why we have to be flexible."

Other areas where FreshDirect likes to demonstrate flexibility are in its supplier relationships and customer marketing programs. Because the company`s business plan is so highly dependent on offering fresh products and delivery within a tight time frame, FreshDirect likes to develop unique relationships with local suppliers and feature them in ways that build their brand awareness or reputation in the New York food and beverage market.

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For instance, FreshDirect`s seafood vendor, Gene Bracher Seafood, like its two dozen other local and regional suppliers, is featured prominently in its own merchandising portal where shoppers can read about Bracher Seafood`s background, an interview with the company`s president and the company`s commitment to supplying quality local seafood.

Spotlight on the chefs

FreshDirect also features its dozen or so executive chefs and food department specialists on the side of its delivery vans and in other advertising programs, including e-mail newsletters, which are delivered to as many as 300,000 opt-in customers.

The company`s core marketing area is Manhattan, as well as parts of Brooklyn and Queens. When the company first began delivering orders, the service was tested on Roosevelt Island and later in Battery Park City. FreshDirect targets virtually all of Manhattan south of 106th Street on the East Side and south of 125th Street on the West Side.

About 50% of FreshDirect`s business is from repeat shoppers, who typically spend $100-$110 each time they place an order. To entice more buyers, especially first-time customers, FreshDirect also offers special promotions such as giving first time customers $50 worth of free seafood spread out over their first three orders. "Our message is `Keep the food fresh and spoil the customers,`" says John Boris, vice president of marketing. "We use Internet order taking on the front end and many people see us an Internet company, but we try to personalize the shopping experience as much as possible."

Keeping busy New York food customers fed and happy at the same time isn`t easy--the average New Yorker eats out just under four times each week, but one-third of new restaurants fail in less than a year, according to Zagat Survey, a hospitality and restaurant ratings company.

Broadening the selection

To keep its customers content, FreshDirect is constantly adding products and adjusting pricing to appeal to a more diverse base of shoppers. FreshDirect recently opened a new kosher foods portal which features products from Aaron`s Best, a leading U.S. supplier of glatt kosher beef, veal, lamb, and poultry.

The company is also taking its web food selling concept to a new market: the corporate office. There are more than 350 million square feet of office space in Manhattan --nearly twice the size of all commercial space in Chicago`s Loop --and FreshDirect sees a ready-made market for its services in the form of catering corporate events and stocking office pantries. FreshDirect recently hired a new marketing firm, New York-based MWW Group, to help it further develop the business plan. But FreshDirect already has more than 100 corporate customers in Manhattan`s bustling midtown section, which on average spend more than $200 per order.

To target specific sections of the corporate market for growth, FreshDirect has added a new corporate section to its web site and collects ZIP codes from interested shoppers clicking on the page to see which office buildings and blocks offer the fastest expansion possibilities. "The service we provide is the same in theory, but we feel that we have a unique offering and distinct advantage in this arena. The corporate market is a potentially large market for us," Boris says. "Right now we`re focusing squarely on mid-town from 20th to 34th street and 40th street to 60th street where some very recognized names in corporate America are headquartered."

Between home and office delivery, Boris says FreshDirect is content with its current business base. "We are enjoying a nice period of controlled growth," he says.

Outside expansion

But despite the fact that FreshDirect is catching on in the nation`s biggest local food market, industry analysts believe the company will have to expand outside of New York if it expects to keep pace with other national players. Peapod, for instance, now serves more than 13 regional markets and recently opened its newest hub in Baltimore. Likewise Safeway, which operates Safeway.com and Vons.com in addition to more than 1,800 stores under several brands including Safeway, Vons, Randalls, Carrs and Dominick`s, is poised for national expansion. "What FreshDirect is doing they are doing extremely well," Bishop says. "The question they need to ask themselves is about timing and not losing out on any potential expansion opportunities."

For his part Furbush isn`t ruling out going national, providing the web grocer follows the example of Starbucks and expands into other markets based on a winning regional plan.

Starbucks Corp. was a regional food retailer in Seattle for nearly 20 years before exploding onto the national and international coffeehouse market with more than 8,000 coffee shops in more than 30 countries and annual sales of $4 billion.

Furbush likens FreshDirect to Starbucks` early "take it slow and get it right " approach and says his company has plenty of time to target other markets. To assist with business development and help the company refine its technology and supply chain operations, FreshDirect in September hired Steve Michaelson, former senior vice president with Weis Markets Inc. and Wegmans Food Markets Inc., as president.

"We will eventually grow in other dimensions, but we`re very systematic and for now we are concentrating on gaining new customers in our current zone." Furbush says. "In terms of both challenges and rewards, there is no food market like New York. For us it`s the best place to be right now."

Mark Brohan is principal of Milwaukee-based The Brohan Group, providing professional editorial and publishing services.

The technology demands of staying fresh and fast

How to use technology to better manage supply chain and fulfillment operations is constant food for thought at FreshDirect. "We are always looking at new ways to do things to drive down costs and expedite order processing," says FreshDirect president Steve Michaelson. "It`s just a part of how we do business."

At FreshDirect`s 300,000-square-foot distribution center in Long Island City, NY, where the company operates 12 different temperature settings from sub-zero to 38 degrees to keep food fresh, the company recently installed specially built printers from Zebra Technologies Corp. made to handle an extra-tough workload.

Other printers couldn`t stand the temperature extremes and slowed FreshDirect`s high-speed order processing system, which fills as many as 1,000 orders per hour. The new Zebra printers, however, are linked to FreshDirect`s enterprise resource planning system and programmed to print ready-to-stick labels with the individual product name and description, regulatory information and its own barcode, which expedites order processing. "The constant temperature and the ranges we use in specific departments are a key component of our supply chain, and how we deliver on our promise of delivering fresh food at great prices," Michaelson says.

In many respects FreshDirect likens its supply chain and fulfillment technology to the same model that made Dell into a web-retailing powerhouse: using e-commerce and integrated systems to build and deliver highly personalized orders.

All of FreshDirect`s front-end Internet order systems are integrated into its SAP ERP and order management platform. The automation of information is also minutely orchestrated with a batch manufacturing system and employee work stations so that orders can be taken as late into a current work day as possible and still shipped in time for next-day delivery.

"FreshDirect uses technology not to create a convenient delivery model, but to change the competitive dynamics in the food retail business," says company co-founder and chairman Jason Ackerman.