How does FreshDirect’s business model differ from traditional grocery store models, and how do these differences affect profitability? Use a table to compare business models and the differences impact.
The first discussion forum focuses on digital transformation in the highly competitive grocery industry. New York-based FreshDirect is profiled in Chapter 3 of your textbook as an example of a company that has leveraged an innovative business model and strategic use of technology to gain a competitive advantage in the market. Review the case summary in your textbook and read the related article on the digital grocery industry to get started. Then address the following case questions in your posting and be prepared to discuss your analysis in class.
How does FreshDirect’s business model differ from traditional grocery store models, and how do these differences affect profitability? Use a table to compare business models and the differences impact.
Discuss the value proposition FreshDirect creates for its customers.
Discuss how FreshDirect leverages technology for (1) operational efficiency and (2) strategic positioning to gain and sustain competitive advantage. Use specific examples of the type of systems or technology the company has invested in and how it impacts competitive advantage.
Discuss the impact of competitors such as Amazon (Whole Foods), Blue Apron, HelloFresh, etc., on FreshDirect’s competitive advantage and (discuss in terms of the Five Forces model).
Do you think FreshDirect’s business model is sustainable for long-term revenue growth and profitability? What potential innovative strategies could FreshDirect consider to overcome future challenges and remain a leader in the industry?
Requirements: enough
3.1 Tech-Driven Strategic Positioning for Market Dominance
Learning Objectives
Understand why earlier online grocery efforts failed, but FreshDirect has succeeded.
Recognize the key resources for competitive advantage that technology and a tech-enabled business model offer FreshDirect.
Understand product-market fit.
Understand the role of time in strengthening these resources.
Recognize why FreshDirect can use technology products that others can buy and still realize tech-created advantage.
For an example of the relationship between technology and strategic positioning, consider New York City–based FreshDirect. FreshDirect CEO and co-founder Dave McInerney is a former chef who has worked in Michelin Star restaurants. His main goal in launching the firm was addressing the gaping quality gap between store-bought produce and the goods that restaurants were using. The solution to this was an e-commerce wonder that disrupted the grocery market and conquered the two most pressing problems for Big Apple shoppers: Selection is limited and prices are high. Both of these problems are a function of the high cost of real estate in New York. The solution? Use technology to craft an ultra-efficient model that provides farm-to-table freshness, massive product choice, and supply chain savings that neither traditional grocery stores, nor delivery firms, can match.
In a market where so many earlier pioneers failed, FreshDirect grew to dominate over 60 percent of the New York City grocery market with just a single facility. Despite a growth misstep when moving to a larger facility, FreshDirect recovered and expanded throughout the Northeast Corridor, steadily growing its footprint to cover seven states through satellite distribution centers. While other retailers struggled during the pandemic, FreshDirect was operating full-tilt, as it raced to keep up with the demand of COVID-19-created home grocery shopping. The firm’s expansion at the expense of traditional rivals, and its refined and superior tech-driven model proved so tempting that Stop & Shop parent, Netherlands-based Ahold Delhaize, acquired a majority stake in the firm, even though Ahold had been trying to grow a home delivery service, Peapod, for years. It’s notable that in the same year as this acquisition, Ahold closed Peapod in the midwestern U.S. due to poor performance. Although acquired, FreshDirect continues to operate independently and serve as a source of expertise for Ahold brands, even as the parent provides additional capital for future growth.
This video analyzes how FreshDirect is able to deliver millions of grocery orders every week. It delves into the forms of technology and artificial intelligence that the company utilizes in order to keep food fresh, as well as make sure that everything gets distributed where it needs to go.
Ordering Online—Challenges but Advantages, Too
The online grocery business had long been the graveyard of ideas that were ahead of their time, brought to market by entrepreneurs who overestimated consumer willingness to use their browser to buy groceries. The billion-dollar failure, Webvan, was one of the biggest crash-and-burns of the dot-com era. Other failed efforts included Streamline, Home Runs, and Shoplink. Turns out, most customers, especially suburban customers, were just fine with the conventional way of shopping. Consumers are creatures of habit and benefit from the immediacy of jumping in a car to get food on their own schedule. They also were unwilling to entrust someone else to pick their produce. All this led to a lack of product-market fitA key concept in entrepreneurship and new product development that conveys the degree to which a product satisfies market demand. Successful efforts should be desired by customers, and scale into large, profitable businesses., the bane of most failed startups that overestimate the appeal of their great idea. The product—online grocery shopping—didn’t fit the immediate need or desire of target customers.
FreshDirect’s market was different, and customers were far more receptive to the ‘fit’ of their solution. In addition to suffering from high cost and low selection, New York–based consumers were notoriously time-strapped, lacked cars, and often lived in walk-up apartments where schlepping home bags of heavy groceries was more of a burden.
While the FreshDirect selection is several times larger than a conventional store, items can be found through search, and shopping can be simplified with more easily discovered, data-driven, Web-delivered recommendations customized on-the-fly with collaborative filtering software. FreshDirect’s “storefront” is a website offering a product mix heavy on fresh produce, as well as one-click menus and semi-prepared specials like “meals in four minutes.” Contrary to what you might see on Manhattan-set sitcoms, many New Yorkers have kitchens the size of suburban closets, so higher-margin semi-prepared foods are especially attractive to anyone with a tiny kitchen.
While setting up the initial order and becoming familiar with a firm’s app and website take time, once this is set up, consumers benefit from ultra-fast follow-up shopping by pulling up and quickly modifying past orders. A week’s shopping can be done from a subway platform in far less time than even a suburban grocery shop with the family car. And once a customer has orders in the FreshDirect system, re-creating orders at a rival site represents yet another switching costThe cost a consumer incurs when moving from one product to another. It can involve actual money spent (e.g., buying a new product) as well as investments in time, any data loss, and so forth. that will deter happy shoppers from trying a rival. A mobile app also changes buying habits by eliminating the traditional grocery list. Instead, just enter order items as you need them, then when your order is full, click a button to schedule next-day delivery.
The FreshDirect model also allows the firm to build a data assetCompetitive advantage related to data which the firm can leverage and which rivals are not able to match. that traditional grocers can’t match. If I walk into a grocery store, pay cash, and don’t use a loyalty card, then the grocer has no idea who I am, how good a customer I am, what I bought, or any leads on how to personalize their market approach to lure me back. By contrast, an online retailer like FreshDirect is able to digitally peer over the shoulder of website and app, browsing visitors as they shop, tying their clickstream to their account, building a customer profile, leveraging this data in product recommendations and marketing campaigns, building more accurate customer experiences by experimenting and learning from results on-the-fly, and further mining data-driven learning for machine learning and other AI systems. Does the data show that customers who buy goat cheese also buy scallions? Modify their shopping experience to place these items next to each other when browsing. See that a customer is vegetarian, buys kosher, shops for low-salt products, or favors gluten-free goods? All this can customize an experience uniquely satisfying to the tastes of the individual. And since brands are built through customer experience, a superior customer experience will strengthen the brandThe symbolic embodiment of all the information connected with a product or service. asset in ways offline rivals can’t match. Understanding the value of data is key. Yes, FreshDirect does use some third-party tools, such as the customer profiling package Selligent, and these tools are also available to rivals. However, it’s FreshDirect’s data, collected on individual customers over time, that creates a barrier that any new rival will need to overcome.
Figure 3.1 More Time = More Data = Strong Competitive Advantage
Source: John Gallaugher.
As an online grocer, FreshDirect is also more responsive to stockout issues and loses fewer potential orders to items that simply can’t be found. Chances are you’ve shopped for a product in a grocery store, couldn’t find it, and moved on to the next item on your list without following up with a store employee. That item may have been out of stock or poorly placed—but the traditional grocer has no idea a service issue even occurred. FreshDirect immediately knows if an item is approaching a stockout, it can place follow-up orders so it will never run out of items, and customers can always find available products through search.
Finally, an online visit can help a customer gain far more useful information than a conventional visit to the grocer, helping consumers make more educated decisions and potentially helping create better meals for home chefs. You’ve likely shopped at times when your neighbors are also in the grocery store—after work, before a holiday or big game. When lines are long, you’re likely to anger fellow customers if you start chatting up the butcher on how to best prepare your cut of meat. But FreshDirect is able to offer one-click recipes, info on order size per person, nutrition information, links to alternate meat cuts and semi-prepared options like marinated steaks or cedar plank glazed salmon, and more. Here’s another advantage for FreshDirect customers: If you walk into a typical grocery produce aisle, you have no idea which apple variety is the freshest. FreshDirect, however, will deliver up a freshness rating, as well as information on which apples are best for baking or a better choice for kids’ snacks. When compared with the shopping cart-crashing, cramped grocery aisles, an online experience presents an appetizing alternative for a generation that regularly turns to the Internet for recipe recs and to fuel “foodie” fantasies. FreshDirect has become so popular that apartment buildings in New York have begun to redesign common areas to include secure freezers that can accept FreshDirect deliveries, even when customers aren’t there.
Cost Cutting and Fresher Food through a Tech-Enabled Supply Chain
After sixteen years refining home delivery from Queens, the firm moved to a new South Bronx facility that’s roughly eleven football fields in size, and includes massive multi-story warehousing alongside corporate offices and R&D labs. Known as the “Food Hive” internally, this facility allows FreshDirect to directly serve customers in the New York ’burbs, Connecticut, and New Jersey. The Hive also acts as a hub for satellite micro-warehouses that supply the Philadelphia and Washington, D.C., area, as well.
The FreshDirect model crushes costs that plague traditional grocers. Worker shifts are highly efficient, avoiding the downtime lulls and busy rush hour spikes of storefronts. FreshDirect workers have a steady, predictable shift, and it’s not uncommon for a specialty skill, like a worker who prepares fish, to cut over 1,000 pounds of product a day. The result? Labor costs that are 60 percent lower than at traditional grocers. FreshDirect buys and prepares what it sells, leading to less waste. Waste is otherwise a big risk among grocers, which often throw out one in seven truckloads of food delivered to stores. At FreshDirect, food waste is only about 1 percent, an advantage that the firm claims is “worth 5 percentage points of total revenue in terms of savings.” Any high quality leftovers are donated to nonprofits like City Harvest.
FreshDirect inventory turnsSometimes referred to as inventory turnover, stock turns, or stock turnover. It is the number of times inventory is sold or used during a given period. A higher figure means that a firm is selling products quickly. (meaning the number of time the average warehouse inventory sells out and is replenished) are 197 times a year versus forty times a year at traditional grocers. This means the firm is selling product faster, so it collects money quicker than its rivals do. And those goods are fresher since they’ve been in stock for less time, too. Consider that while the average grocer may have seven to nine days of seafood inventory, FreshDirect’s seafood stock turns each day. Stock is typically purchased direct from the docks in order to fulfill orders placed less than twenty-four hours earlier, and the firm targets the last catch of the day so the product will be as fresh as possible.
Once items are shipped to FreshDirect, they are held in ideally acclimated storage. The firm has thirty-eight separate storage rooms with perfectly tuned temperature and humidity. Produce is also delivered in refrigerated trucks, so items hit outside temps only during the final steps of delivery. The firm’s execs estimate that this unmatched climate control can extend shelf life a further seven days, on average, over the typical grocery store product, even though FreshDirect products rarely sit on shelves this long.
Co-founder and CEO David McInerney maintains that FreshDirect’s supplier-integrated, super-fast “farm-to-fork” supply chain also allows food to be harvested for optimal freshness, yielding taste that far outpaces the competition. The firm goes a step beyond conventional grocery stores by regularly evaluating product taste and sharing these results with customers. Every day, teams inspect and sample between 400 and 500 items and refine the one-to-five freshness ratings you’ll find on their website.
FreshDirect’s business is far more challenging than Amazon’s non-food e-commerce business. The food that the firm specializes in selling is called perishables for a reason—wilted greens, bruised fruit, cracked eggs, and temps that create reeky fish are all hazards faced by grocery delivery. Screw up a delivery, and “hangry” customers will hunt for an immediate option to quiet grumbly bellies. Artificial intelligence software, coupled with over nine miles of conveyor belts and over seven miles of fiber-optic cables, link staff and produce with systems and sensors, and support everything from walking staff through baking the perfect baguette to verifying orders with 99.9 percent accuracy. Workers offer skilled insight where AI can’t, with specialists responsible for twenty to thirty products hand-inspecting orders for optimal quality. Automated bins park in front of workers along with a system-generated message stating exactly what’s needed from a given station to fulfill an order. The bin has a barcode that refers to the specific order, and each item placed in the bin has another barcode that’s scanned and used to confirm the accuracy of what goes in the bin. Conveyors bring bins to the next product station needed to fulfill the order, until all groceries for a single order have been gathered and double-checked. Over time, operations data has helped the firm improve layout for even more efficiency, positioning items more likely to be packed together so they can be fulfilled by a single worker at a station.
Once completed, the system scoots conveyor-belt orders to be organized by neighborhood, speeding along driver departures. The highly tuned system used at their new facility has cut 75 percent from packing time, allows an order be fulfilled in under thirty minutes, and presents a huge efficiency advantage over services like Instacart that may send a less efficient human on a produce run and delivery in a standard, non-refrigerated automobile.
Climate-controlled warehouses not only keep food fresher and cut food waste, they also save big bucks through energy efficiency. A traditional retailer has produce on display in money-sucking open refrigerators that swap air with the store’s customer-focused HVAC systems, inefficiently fighting to keep products cool while not freezing out summer shoppers in shorts and flip flops. At FreshDirect, staff dress for the “weather” they expect in the storage room where they work. The firm also uses recycled biodiesel fuel to cut down on delivery costs, and recyclable bags for delivery (New Yorkers don’t want more cardboard boxes crowding their already limited living space). Scale allows the firm to benefit from additional delivery savings. As the company has grown, a single truck run serves more customers in a smaller geographic area. The firm now dispatches large trucks that park near customer locations, with drivers fanning out to deliver groceries on foot. The result? Less traffic, fewer traffic tickets (previously a multi-hundred-thousand-dollar problem for the firm), and although trucks are larger, the firm can get by with one-seventh the comparable fleet size. Customers who would otherwise drive to the grocery store can also feel green about their decision to order online. One study suggests delivery trucks produce 20 to 70 percent less emissions than trips made in personal vehicles.
Work with Suppliers, Don’t Squeeze Them
The Direct in the firm’s name doesn’t just mean direct to consumers, it also means direct from suppliers. The three-tier model described “from farm or sea to our house to your house” eliminates three to four additional wholesaling and warehousing steps that might slow product and increase costs for traditional rivals.
FreshDirect buys directly from suppliers, eliminating middlemen wherever possible, but rather than antagonizing suppliers by pitting one against another for the lowest possible price, the firm develops closer partnership relationships, even developing specialty products (examples, staggered planting schedules to extend the freshness season for available cantaloupes, blueberries sorted for large size, or smaller eggs that are more flavorful). The firm also offers suppliers several benefits beyond traditional grocers, all in exchange for more favorable terms. These include offering to carry a greater selection of supplier products while eliminating the “slotting fees” (payments by suppliers for prime shelf space) common in traditional retail, cobranding products to help establish and strengthen supplier brand, paying partners in days rather than weeks, and sharing data to help improve supplier sales and operations.
Figure 3.2 The Advantages of Buying Direct
Source: John Gallaugher.
Advantages Pay Off
Add all these advantages together, and the firm’s big, fresh selection is offered at prices that can undercut the competition by as much as 35 percent. And FreshDirect does it all with margins in the range of 20 percent (to as high as 45 percent on many semi-prepared meals), easily dwarfing the razor-thin 1 percent margins earned by traditional grocers.
FreshDirect’s customer base has ballooned to over 600,000. That’s a population roughly the size of metro-Boston, serviced by a single grocer with no physical store. The privately held firm has been consistently profitable since 2010, save for issues related to the botched move to a new, larger Bronx facility (see ), and has continued to raise capital to fuel geographic expansion.
Key Takeaways
While earlier online grocery efforts overestimated the appeal of online grocery shopping, FreshDirect targeted a market where there was a high degree of product-market fit.
The fundamentally different, tech-enabled, three-stage model is enabled using a value chain that cuts out middlemen, speeds product to market, improves freshness and food safety, and lowers costs in a way that rivals cannot match.
Many of the firm’s tech-created assets grow over time. These include data used in collaborative filtering and other personalization efforts, and data used to train and refine machine learning models.
A data asset, like that gathered by FreshDirect by monitoring app and website use, supplier interactions, product flow, and warehouse operations, is unique to the firm and strengthens over time. Even if rivals use some similar software products, new entrants won’t be able to match results delivered by firm- and customer-specific data that has been acquired over time.
3.2 The Model Moves Forward
Learning Objectives
Understand why FreshDirect struggled when switching from its Queens to the new, larger Bronx facility.
Recognize how the firm used technology and nontechnology solutions to address initial systems failure.
Learn steps a firm might take to avoid a similar fate in rolling out a complex system.
See how COVID-19 presented challenges as well as opportunities for FreshDirect, and how it leveraged its unique business to provide additional community benefits as a government and nonprofit partner.
Understand the threats from nontraditional entrants in the online grocery market, and the reasons why Stop & Shop’s parent firm acquired FreshDirect.
The Botched Bronx Move—Even the Skilled Screw Up
FreshDirect’s initially problem-plagued move from Queens to the Bronx also offers important lessons for executives leveraging technology, on both the factors associated with a poorly handled systems rollout, and on steps taken to regain customer trust. The move to larger, more modern facilities was meant to herald a new era of firm growth. But instead, the Queens to Bronx facility switch led to order mishaps, angry customers, brand damage, financial loss, and a plummeting market share. Even the skilled can screw up.
The firm turned on the Bronx system without sufficient testing, or understanding problems that might occur from the larger facility with far more complex systems. When the system went live, the company switched orders immediately from old system to new. A phased rollout, ramping up orders to see how systems and procedures responded to an increased workload, and providing a fallback from failed systems to older but reliable efforts, could have helped the firm catch and correct problems. Instead, problems immediately surfaced throughout a system that was handling 100 percent of orders. The firm was flooded with complaints of broken eggs, spoiled fruit, mispackaged or missed orders, and more—the kind of gaffes that the firm prided itself on preventing. Food is at the base of the Maslow’s Needs pyramid—screw this up and customers are likely to be very angry. The firm’s share of the New York grocery market fell from 66 percent to less than 46 percent. Even worse, this created an opening for rivals that happy customers were unlikely to try. Amazon saw their market share rise from 8 percent to 22 percent, and delivery from Instacart also increased. The firm’s prior CEO stepped down, elevating co-founder McInerney to his current role as CEO.
To stop the bleeding, McInerney brought in external consultants to work with problem-solving internal teams. From a technical perspective, it was even difficult for FreshDirect to identify where problems were occurring, let alone how to solve them. Systems were an unwieldy mix of separately developed products that had been meant to work together, but that were failing. Fortunately, a tool provided by software vendor Splunk was deployed to gather log data in a central repository, making it easier to recognize, identify, and respond to problems throughout a mix of different systems.
Flubbed orders also received priority service. The firm beefed up customer service and launched a “Direct to David” feedback line to reach the CEO if problems persisted. Instead of offering a future credit for missing items, FreshDirect immediately dispatched a driver to fix the order, sometimes even sending a worker in an Uber. An order from a new customer was also packaged in special bags, alerting drivers to take extra care and be prepared to answer questions and welcome them to FreshDirect. While such customer-focused error handling is money-losing in the short run, it’s potentially far less damaging than forgoing a lifetime of future orders from a churned-out customer who switches to a rival, never comes back, and who may share a FreshDirect horror story with others.
COVID-19: Crisis and Opportunity
While no one would wish for a pandemic, the timing of the crisis that emerged after FreshDirect had corrected earlier systems and procedural issues, helped the firm not only regain lost customers, but also accelerated firm growth to an extent that was difficult to keep up with. The New York metropolitan area was hit early and hit hard by the coronavirus. A city lockdown, work-from-home mandates, and customers reluctant to shop in person led to a surge in online orders. Web traffic was up 800 percent, and suburban orders, a customer base that typically required more persuasion to try online grocery ordering, doubled overnight. Just one month into the pandemic, FreshDirect had difficulty fulfilling orders.
FreshDirect was subsequently deemed an “essential service” by New York City authorities, with staff considered “frontline workers” vital to maintaining the food supply chain. The firm quickly shifted operations in ways that could help maintain existing orders. For example, the firm limited the variety of meat cuts so that its butcher staff could fulfill demand with an increased order pace. Work-from-home customers who were no longer eating out were increasing order size, but FreshDirect’s advantages were apparent here, as well. An order that might require two Instacart employees to enter a grocery store could still be fulfilled as a single FreshDirect delivery.
FreshDirect also became a vital partner to a city in crisis. Through “Operation 5-Borough Food Drive,” the firm collaborated with borough presidents on a $9 million contract to deliver 4.3 million pounds of food to address rising city food insecurity, while creating an additional forty jobs.
The firm also partnered with on-site dining management firm Restaurant Associates to employ laid-off food service employees to prepare ready-to-eat meals. When a FreshDirect customer ordered one of the prepared meals, a second was also prepared and donated, free-of-charge, through New York City Food Pantries. While no single firm effort can make up for the restaurant workers displaced by COVID-19 kitchen shutdowns, nor feed every hungry belly in America’s largest city, FreshDirect was uniquely positioned to have an outsized impact in a time of desperate need in an unprecedented crisis.
Better than Traditional Grocers, but Other Rivals?
The FreshDirect model is superior to conventional grocery stores in just about every way, and the firm has devastated the competition while delivering on quality, selection, and value. However, one threat successful firms face is the potential entry of even better-funded, growth-seeking rivals to try to squeeze them out of the current market. And many of these firms have profitable, non-grocery core businesses that can fund a costly fight to try to win FreshDirect customers. For years, the king of e-commerce, Amazon, has expanded into the $700 billion market for grocery retail. The firm purchased Whole Foods and is integrating the chain into Amazon offerings; the firm’s Amazon Go cashier-less shops have moved beyond the experimental stage and are now within reach of FreshDirect’s New York City customers; and the firm bought a massive Northern New Jersey distribution center formerly owned by grocer PathMark. Estimates suggest the facility may be able to move ten times the dollar volume of FreshDirect’s new Bronx distribution center. Amazon also offers same-day delivery free to Amazon Prime subscribers, prompting FreshDirect to roll out a same-day service in many markets, as well as FreshDirect Express, for a smaller selection of curated products, takeout alternative semi-prepared foods, and beer and wine. Even more troubling: Many delivery items are cheaper from Amazon Fresh than from FreshDirect (a firm once known for its low prices, but now seen as a premium price for premium quality supplier). And Amazon Fresh can also deliver many of the non-grocery items you can order on Amazon’s main website. Walmart is also crowding in on FreshDirect’s turf. It’s opened up its own Bronx-based food-focused warehouse for its Jet.com division, now rolled into Walmart.com. Kroger, the largest pure-play grocery in the U.S. (Walmart is biggest overall), has purchased a bigger stake in British online grocer Ocado and plans to use the firm’s tech to automate warehouses and process online orders. There are other players in the market, too, including Instacart, which leverages a network of Uber-style contract delivery workers to pick groceries from popular retailers that include Whole Foods and Costco. But market entry does not mean market success. Google shuttered its anemically performing Google Express service. FreshDirect’s purchase by Stop & Shop parent Dutch grocery giant Ahold Delhaize also illustrates challenges of adapting traditional models, as the firm has struggled to achieve Peapod growth despite years of experimentation and model refinement. And the rise of meal kit delivery firms such as Blue Apron, provide a different alternative to conventional grocery shopping (FreshDirect has co-invested with Campbell Soup in rival meal kit firm Chef’d).
Early reviews of Amazon Fresh in New York City have criticized the firm for a poor online shopping experience and an uneven selection. These are problems a well-funded and patient giant may be able to iron out over time. It’s unclear if FreshDirect’s initial advantages will hold up as competition increases. FreshDirect’s technology, customer base, and supplier savvy made it an attractive acquisition for grocery giant Ahold Delhaize and we’ll see if the firm’s new sponsor will enhance the firm’s staying power and growth. Says FreshDirect’s CEO: “In a $700 billion industry, there’s plenty of space for a lot of different people to play. [The firm] is doing spectacu larly, and we continue to see strong growth in this environment.” Markets segment and it’s quite possible that FreshDirect will leverage its advantages to nurture and grow a customer base valuing high-quality produce and semi-prepared meals, while rivals pick up the low end of more price-sensitive customers or orders for non-perishable packaged goods.
Future Deliveries?
Technology is critical to the FreshDirect model, but it’s the collective impact of the firm’s differences when compared to rivals, this tech-enabled strategic positioning, that delivers success. Over time, the firm has also built up a set of strategic assets that not only address specific needs of a market but are now extremely difficult for any upstart to compete against. Traditional grocers can’t fully copy the firm’s delivery business because this would leave them straddlingAttempts to occupy more than one position, while failing to match the benefits of a more efficient, singularly focused rival.. Entry costs for would-be competitors are also high (the firm spent over $75 million building infrastructure before it could serve a single customer), and the firm’s complex, highly customized, and mostly proprietary software, which handles everything from delivery scheduling to orchestrating the preparation of thousands of recipes, continues to be refined and improved each year. On top of all this comes years of relationship building with suppliers, as well as customer data used to further refine processes, feed even smarter machine learning and other AI models, speed reorders, and make helpful recommendations. Competing against a firm with such a strong and tough-to-match strategic position can be brutal. Just five years after launch there were one-third fewer supermarkets in New York City than when FreshDirect first opened for business. FreshDirect’s surge of suburban growth also claimed once notable regional player Kings/Balducci as another victim, with that firm filing for Chapter 11 banruptcy in 2020. Will we see FreshDirect in even more locations following the Ahold acquisition? Will Stop & Shop and other Ahold brands leverage FreshDirect tech to fend off massive rivals, including Amazon, Walmart, and Kroger? Watching this market will reveal the durability of competitive assets, but also the challenges in leveraging these assets in new geographies with radically different, new competitors.
Key Takeaways
FreshDirect migrated to a new, more complex system without adequate testing and with no fallback mechanism that could take over if the new effort ran into problems.
More thorough testing, slowly switching capacity from old to new systems, and maintaining a mechanism to switch operations to the old system if the new system were to fail could all have prevented the scope of FreshDirect’s system migration problem.
Tools like Splunk can help the firm query related data that is otherwise not linked, surfacing problems and potential areas that require correction.
COVID-19 led to a massive spike in business as more consumers ordered from home, and suburban customers flocked to FreshDirect. The firm reduced offerings, such as limiting the cuts of meat, so that existing, overworked staff, could keep up with demand.
The firm also worked with Restaurant Associates to employ area chefs to cook and package ready-to-eat meals. This employed out-of-work restaurant staff and allowed FreshDirect to staff up during an unexpected demand peak. The firm also partnered with New York City boroughs governments and nonprofits to fund and deliver free meals to hungry New Yorkers.
Amazon, Walmart, and experimenting traditional grocers all covet the growing online grocery segment, and many have begun competing with FreshDirect. Stop & Shop’s parent had struggled with Peapod, a model not as efficient as FreshDirect, and lacking the latter’s product-market fit, so that parent firm (Dutch grocery giant Ahold Delhaize) purchased the firm but will operate it as a separate unit while it provides capital for future expansion.
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