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New York’s FreshDirect Succeeds
When Most Online Grocers Have Failed

Supervalu just announced that it is ending delivery of online orders. In most cities, consumers will still be able to order on line but will have to pick up the food at a store.

Many other retailers have abandoned computer ordering all together, such as Publix.

We thought we should talk to a computer ordering and delivery service that appears to be thriving. We asked Pundit Investigator and Special Projects Editor Mira Slott to find out more:

Steve Druckman
Chief Marketing Officer
Long Island City, New York

Q: Not long ago, the concept of web-based grocery for perishable products, and in particular fresh produce, seemed dead in the water. High profile Webvan went bankrupt, swept up in the bust, along with other failed attempts, including Home Grocer, ShopLink and Streamline. Many industry executives expressed cynicism on the viability of the medium. Could you discuss the evolution of the online supermarket, the environment when you started your first deliveries, and what has changed?

A: When we got into the business and launched FreshDirect in 2002, it was a pretty new phenomenon. Webvan was crashing and burning. We had to focus on doing things differently than others. We targeted the perishable side and realized a way to differentiate ourselves. The key was to come up with a convenient experience that combined consistent, top quality product to have a viable business.

Right now, we’ve developed an amazing produce department, as well as one for meat, seafood, cheeses, and a full kitchen where we do fresh, wholesome, high-end meals; that whole side of perishables is what distinguishes us.

We launched FreshDirect when people were getting a little more comfortable with the Internet. Everyone shops from the Internet in one way or another; they’re at ease with using their credit cards online. This wasn’t the case in the 1990’s.

Q: Skeptics questioned the concept for two main reasons: First, operational and distribution obstacles, unless supermarket chains used it pivotally in conjunction with brick-and-mortar infrastructure. Second, consumers would shun the intangible, virtual format, craving the aroma and tactile in-store shopping experience, as well as the vibrant, impulse-laden displays that draw shoppers into the produce department. How have you overcome these impediments?

A: Probably the biggest challenge is to get customers to give us a try, explore a different way to shop for groceries; instead of trips two to three times to the grocer each week, you can pick it up right here. There’s a leap of faith, but once hooked, we’ve got them. Our website is easy to use, playing to quality, mix and service.

The biggest adjustment for our customers is in buying produce — putting the trust in our hands. We try to convey the expertise of our staff and provide a personal touch. New customers realize after ordering once or twice, our product specialists are often better to select items because they’ve done this their entire career. It’s still a challenge to convey over the web.

Q: Rick Braddock [Chairman and CEO of FreshDirect] says loyal customers account for 59 percent of total sales. How would you describe these heavy users? Is your niche higher-income, techno-savvy, apartment dwellers… those juggling fast-paced urban lifestyles?

A: The big part of our business is in Manhattan, while we service the New York metropolitan area. Families are a predominate sweet spot, those with more income, and people with lots of mouths to feed. Our customers range in age, averaging between 30 to 55-years-old; 75 to 80 percent of our audience is female, and the moms are the core segment.

We maintain really good pricing, some of the best in the city. We do weekly pricing on major items and targeted specialties to stay competitive in our markets. We look at a selective list of products, and it’s our job every week to understand who’s out there doing what.

Q: Do you see a resurgence of the medium? Amazon is pilot-testing grocery delivery service in the Seattle marketplace, offering a variety of perishable foods, including fresh fruit and vegetables and value-added produce like Fresh Express packaged salads. MyWebGrocer is partnering with major retail chains, including a new venture with Peapod, to create more exciting and profitable online shopping.

A: We’re not worried about Amazon coming into this. It sheds more light on our business in a way. If billions upon billions more people get into on-line grocery shopping, the better for us. It’s a hard business, operationally difficult. We do 40,000 orders in a week, and half of those are perishable items. From buying to facilities to the customer, it’s not easy to replicate. Amazon has the brand name, but actually doing it well and being profitable is a whole different game. We consider our competition high end retailers and specialty chains like Whole Foods.

Q: How is FreshDirect positioning itself for future growth? With your New York City bent, is the format easily transferable to other markets? Is your customer base growing or changing? Are you looking to expand into new market areas?

A: We’re getting it right in New York, and we still have a lot of room in New York. At this point, we’re focusing on perfecting the website customer experience. If we branch out to neighboring states like Connecticut, we’re likely to go to places like Stamford and Greenwich. The truth is there is a lot of territory for us to do in New York. If we decided to expand really fast, we wouldn’t have built in infrastructure and tools for the best consumer experience. That is why Webvan blew up. It grew too fast. If they launched when we launched they would have failed. They didn’t start with the customer first.

Our strategy is customer-centric. We do weekly consumer studies, a monthly brand study, a web study every quarter. We’re always talking to customers asking, what can we do to improve? What are we doing wrong that we can fix? That is the culture at FreshDirect. It’s the service level, quality and pricing. We really listen, change, and adapt.

Q: Could you provide examples where consumer input jumpstarted or transformed ways of doing business?

A: At one point, our minimum order size was $50. We lowered it to $30 after learning that many of our customers want to place fill-in orders in the middle of the week.

Our produce rating system was a direct reaction to consumer feedback: “I can’t see, touch and smell the products. I have to rely on you.” It comes out as a negative. We’ve spun it into a positive.

Q: Tell us more about your star-rating system of evaluating produce. How does it work exactly? Are you finding people receptive to the concept?

A: We have experienced produce people, some in the business 50 years that rate produce items daily utilizing a five-star system. The rating is determined based on an assessment of various product characteristics. Five stars means it’s never better; it’s the best we’ve seen. We don’t give a lot of five stars because we reserve them for exceptional, premium items. Four stars means it’s delicious, and good right now to eat. If the customer surfs the store, we try to steer them to buy those four- and five-star products.

Q: Do most people pick the highest quality items? Could there be a backlash if people think FreshDirect’s product is not always top quality?

A: We try to give the best options available. Citrus is amazing in the winter, if you want to buy oranges in the summer, they’re not that great, so ratings might start at 2 or 3. We don’t want consumer expectations above what the truth is.

I’d rather tell them up front. If we get some berries this season and a batch of strawberries aren’t great but good or average, it won’t meet expectations. Maybe a customer wants the strawberries for a recipe and appreciates the value. The rating system takes away the need for the customer to taste and smell the product. I believe we’ll pick better than the average consumer. We have people who know the product. We actually taste it, whereas if you’re in the grocery store, you can’t taste for sugar content. We know where crops were grown; all the important information the regular customer wouldn’t be able to easily access.

Q: Have the ratings changed consumer buying patterns? Have you tracked and analyzed fluctuations in sales and profits since instituting the five-star rating system?

A: Our customers love it. Around 70 percent of customers have said they purchased something they wouldn’t have. “I’ll get my milk, paper towels, but what fruit will I order? I’ll shop from the top because I want the best produced.”

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.

Q: I imagine you’ve gathered a highly refined database of individual customer purchasing and eating patterns in which to tailor strategy… How do you capitalize on this built-in consumer research platform? What have you learned?

A: We have a pretty sophisticated website that we try to customize to our base. We have some of the best data out there, down to the SKU level for all our customers. We help use that data to steer you to products at the bottom of your shopping cart. We show you things you normally purchase that are not in the cart right now; here are your favorites, did you forget anything? In one click you can add them to your cart. We also start to get more sophisticated and recommend other items people similar to you purchased.

Also, if you’re buying chips, we recommend guacamole or an easy recipe with all the ingredients to make it. We won’t just recommend any dressing for your salad items, but the ones you’ve purchased or meet your flavor or brand preferences. The strategy significantly increases sales by encouraging consumers to throw more items in their virtual shopping cart, while introducing them to new items and ideas to build on for next time.

Q: Do the systems allow one to specify, “I want one melon ripe for breakfast and another that will be ripe in four days when my dinner party is scheduled? I want my bananas grass green or all yellow/speckled brown?”

A: We have tried ripe and not ripe options in a few areas, but it is very difficult to do. We zoned in on avocados and order Hass regular, and packed and read- to-eat. They try to do this in some supermarkets, but ultimately consumers will squeeze the avocados anyway. We entertained the notion that we could do this with bananas, but it’s a challenge. We are focused on the stone fruit program this summer, getting shipments two or three times a week. Customers will get stone fruit with a ripening bag to put on their counter.

Q: Your core strategy in a discussion we had several years ago was to build a meals business, where consumers could create meals through accessing recipes and easily finding all the fresh ingredients needed, or buy the meals ready to cook or heat and serve in a few clicks. Has this concept taken off and met your expectations?

A: Recipe functionality is an important component of our site. Consumers can peruse through hundreds and hundreds of recipes if they’d like. You go to the recipe section and choose a category, a special occasion, a main ingredient, real simple recipes, themed, dietary, by course or by cuisine; say you click on Asian, Chinatown soy sauce chicken, you see the recipe source or cookbook, ingredients and prep, and below the main ingredients, it also lists ingredients that you may already have. We’ll suggest gingerroot, chicken or wine to add to your cart. A lot of our customers use it. It’s a point of conversation. For folks who are time-challenged, we have a kitchen right here where we cook high-quality, prepared meals to heat and eat. For most of our consumers, it’s actually a mix; for myself, there are times when I want to cook and some when I don’t.

Q: What have you done on the health and nutrition front?

A: We have a partnership with the American Cancer Society for a healthy eating program, and additionally offer sections for allergies, gluten-free products, carb conscious, etc., following trends of what customers want. The company actually has a nutritionist on staff, Eileen Vider. We offer kids meals, both lunches for schools, and kids’ dinners. They all come in containers they can take to school. There are perishables in there, but shelf life is at least a week. We look for alternatives to Oscar Mayer Luncheables. Ours is such a healthy version of that, it can’t even be compared.

Q: Could you share more information about your sourcing operation?

A: We have a team of buyers that work on different programs; a produce team, a meat and seafood team. They try to source perishables direct from the farm or dairy, going right to the source. Without the middleman, it cuts on costs. It also increases shelf life if the load comes direct. It can mean an extra five days to a week of shelf life for our customers.

Because we are servicing out of one place the size of 25 supermarkets, and our volume is so large, we are able to capitalize on economies of scale to bring in direct and turn so much faster than a typical grocery store. There is no waste. We have very closely monitored temperature-controlled areas. And we don’t have the real-estate costs of brick and mortar chains.

Q: How is procurement handled? How important is produce to your overall mix. What opportunities are there for produce companies to get involved with your business?

A: We are always open to new suppliers. At the same time we have a real focus on locally grown produce and long-standing partnerships with New York area farms like Satur Farms and Red Jacket Orchards. Customers love the local, hand-picked touch.

Q: Are you instituting any sustainability measures. Do you want your suppliers to provide special packaging? Does your home-delivery system require unique packaging needs?

A: Because we have a delivery component, there is a packaging system, where we’ll pick the product, it goes in a box to the truck to the customer. There are things we do to make sure the quality stays pure. For bananas, for example, we put a wrap around them to make sure they are not bruised when they come to you.

We are always looking at ways to cut back on packaging. It’s the Ying and Yang; first we must be sure quality holds up. We have huge projects underway to reduce packaging, and are currently rolling out a project to eliminate 1.5 million boxes a year, down from an average of 9 million. We’re trying to be as efficient as we can in getting products to our customers.

Q: How has the economic crisis impacted your business? Have you made adjustments in your pricing or value propositions? Rick Braddock says the firm is profitable and finished first quarter with a year-to-year growth rate of 15 percent, which is quite a feat in the current financial environment.

A: We’re actually doing really well in this environment; our customers travel a lot and go out to dinner a lot, and the economic crisis has made people stay at home more. We have restaurant-quality products people can cook at home. For us, the question is how we can maximize our business within the competitive marketplace.

We found this most intriguing. Many years ago, Ed McLaughlin of Cornell University and his team did a study on Internet shopping. We remember expecting to find that consumers would not be willing to order produce online because of doubts about ripeness, flavor and quality.

Yet Professor McLaughlin’s research said otherwise — it actually showed that what we thought would be online shopping’s biggest weakness could be its biggest strength.

The study indicated that consumers had very little confidence in their own ability to select a ripe melon, a sweet pineapple, an avocado ready to make guacamole with, etc. Consumers felt that a store was more likely to have experts to make these decisions correctly.

We have no idea if FreshDirect knew about the research or reproduced it on its own, but, very clearly, FreshDirect has fallen into the sweet spot identified so many years ago by Professor McLaughlin.

Maybe the reason so many shopping services have died is because they have been focused on dry grocery, when the consumer need is for help picking perishables.

Many thanks to Steve Druckman and FreshDirect for helping the industry to understand their important work.

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