October 28, 2004, 12:00 AM

Battling Congestion

Online grocer FreshDirect believes its New York delivery model has life outside the Big Apple.

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

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