Discuss the FreshDirect business model and list reasons for its competitive advantage.
Case 1_FreshDirect Forum Discussion
Please read related case information (see the PDF file attached or Chapter 3 in your textbook) and write one paragraph revolving around one or all the discussion questions. This assignment is graded purely on effort. It replaces what is typically in-class discussion about how we study is evident in the real world. Everyone needs to participate/post in AT LEAST three case discussions (e.g., Case 1, Case 3, and Case 5). We will have five or more cases throughout this semester.
While you post in the discussion forum, please follow the below rules:
Read relevant case materials and questions thoroughly. You may Google or Wikipedia extra information if needed.
Think before you post. Try to post some constructive ideas and feedback instead of simple words like “yes, I agree” or “no, I don’t agree.”
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Case #1 Discuss Guiding Questions
Discuss the FreshDirect business model and list reasons for its competitive advantage. Relate your answer to the strategic models we learned before, such as SWOT analysis, Porter’s three generic strategies (i.e., cost-leadership, differentiation, focus), five forces, and value chain models.
Technology-enabled strategic positioning is the key to FreshDirect’s success. Please illustrate that with some examples and your thoughts.
Anything that FreshDirect can do better in the competition with Amazon, Instacart, Walmart, Shipt, etc.?
Requirements: long
9/8/22, 9:22 AM2.1 Introduction | Information Systemshttps://scholar.flatworldknowledge.com/books/34828/fwk-38086-ch02_s01/read1/5Different Is Good: FreshDirect Redefines the GroceryLandscape in New York City and BeyondFor an example of the relationship between technology and strategic positioning, consider FreshDirect.FreshDirect CEO Dave McInerney is a former chef who has worked in Michelin Star-earning restaurants. Hismain goal in launching the firm was addressing the gaping quality gap between store-bought produce and thegoods that restaurants were using. The solution to this was an e-commerce wonder that disrupted the grocerymarket and conquered the two most pressing problems for Big Apple shoppers: Selection is limited andprices are high. Both of these problems are a function of the high cost of real estate in New York. Thesolution? Use technology to craft an ultra-efficient model that provides farm-to-table freshness, massiveproduct choice, and supply chain savings that neither traditional grocery stores, nor delivery firms, canmatch.The firm’s “storefront” is a website offering a product mix heavy on fresh produce, as well as one-click menusand semi-prepared specials like “meals in four minutes.” The ability to pull up prior grocery orders fuels fastreorders, and a mobile app eliminates the need for a grocery list. Enter order items as you think of them, thenclick a button to schedule next-day delivery. All these features appeal to the time-strapped Manhattaniteswho were the firm’s first customers. Area shoppers—many of whom don’t have cars or are keen to avoid thetraffic-snarled streets of the city—were quick to embrace the model. The service is now so popular thatapartment buildings in New York have begun to redesign common areas to include secure freezers that canaccept FreshDirect deliveries, even when customers aren’t there.After sixteen years refining home delivery, the firm moved to a new, 400,000 square foot facility alongsidecorporate offices and R&D labs in the South Bronx. Known as the “Food Hive” internally, the facility’s sizeand concentrated set of resources allows FreshDirect to offer a fresh goods selection that’s over five timeslarger than local supermarkets. And a bigger facility allows FreshDirect to service more customers, too.FreshDirect now serves customers in Washington, D.C., and its suburbs, New Jersey, Connecticut, and aBoston service is in the works.The FreshDirect Operation
9/8/22, 9:22 AM2.1 Introduction | Information Systemshttps://scholar.flatworldknowledge.com/books/34828/fwk-38086-ch02_s01/read2/5This clip explains how FreshDirect’s operation works and discusses their tech-enabled warehouseoperation by taking you on a tour through their factories.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. The result? Labor costs that are 60percent 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 deliveredto stores. At FreshDirect, food waste is only about 1 percent, an advantage that the firm claims is “worth 5percentage points of total revenue in terms of savings.” Any high quality leftovers are donated to nonprofitslike City Harvest. Overall perishable inventory at FreshDirect turns 197 times a year versus forty times a yearat traditional grocers. Higher inventory turns mean the firm is selling product faster, so it collects moneyquicker than its rivals do. And those goods are fresher since they’ve been in stock for less time, too. Considerthat while the average grocer may have seven to nine days of seafood inventory, FreshDirect’s seafood stockturns each day. Stock is typically purchased direct from the docks in order to fulfill orders placed less thantwenty-four hours earlier, and the firm targets the last catch of the day so the product will be as fresh aspossible. Co-founder and CEO Dave McInerney maintains that FreshDirect’s super-fast “farm-to-fork” supplychain also allows food to be harvested for optimal freshness, yielding taste that far outpaces thecompetition. The firm goes a step beyond conventional grocery stores by regularly evaluating product tasteand sharing these results with customers. Every day, teams inspect and sample between 400 and 500 items.The ratings (from one to five) that accompany produce on the website help consumers make more informedshopping decisions than they would from a trip to the local market.FreshDirect’s business is more challenging than Amazon’s non-food e-commerce business. The food that thefirm specializes in selling is called perishables for a reason—wilted greens, bruised fruit, cracked eggs, andtemps that create reeky fish are all hazards faced by grocery delivery. Screw up a delivery, and “hangry”
9/8/22, 9:22 AM2.1 Introduction | Information Systemshttps://scholar.flatworldknowledge.com/books/34828/fwk-38086-ch02_s01/read3/5customers will hunt for an immediate option to quiet grumbly bellies. Artificial intelligence software, coupledwith nine miles of conveyor belts and over seven miles of fiber-optic cables, link staff and produce withsystems and sensors, and support everything from baking the perfect baguette to verifying orders with 99.9percent accuracy. Workers offer skilled insight where AI can’t, with specialists responsible for twenty to thirtyproducts hand-inspecting orders for optimal quality. Automated bins park in front of workers along with asystem-generated message stating exactly what’s needed from a given station to fulfill an order. Oncecompleted, the system scoots orders to be organized by neighborhood, speeding along driver departures. Thehighly tuned system used at their new facility has cut 75 percent from packing time and presents a hugeefficiency advantage over services like Instacart that may send a less efficient human on a produce run andauto delivery. Since it doesn’t need the money-sucking open-air refrigerators of the retail store competition,the firm even saves big on energy (instead, staff bundle up for shifts in climate-controlled cold rooms tailoredto the specific needs of dairy, deli, and produce). The firm also uses recycled biodiesel fuel to cut down ondelivery costs, and recyclable bags for delivery (New Yorkers don’t want more cardboard boxes crowdingtheir already limited living space). Customers who would otherwise drive to the grocery store can also feelgreen about their decision to order online. One study suggests delivery trucks produce 20 to 70 percent lessemissions than trips made in personal vehicles.FreshDirect buys directly from suppliers, eliminating middlemen wherever possible. The firm also offerssuppliers several benefits beyond traditional grocers, all in exchange for more favorable terms. These includeoffering to carry a greater selection of supplier products while eliminating the “slotting fees” (payments bysuppliers for prime shelf space) common in traditional retail; cobranding products to help establish andstrengthen supplier brand; paying partners in days rather than weeks; and sharing data to help improvesupplier sales and operations. Add all these advantages together and the firm’s big, fresh selection is offeredat prices that can undercut the competition by as much as 35 percent. And FreshDirect does it all withmargins in the range of 20 percent (to as high as 45 percent on many semi-prepared meals), easily dwarfingthe razor-thin 1 percent margins earned by traditional grocers.FreshDirect’s customer base has ballooned to over 600,000 paying customers. That’s a population roughlythe size of metro-Boston, serviced by a single grocer with no physical store. The privately held firm has beenconsistently profitable since 2010. Annual revenue exceeds $600 million, and in 2017 the firm raised anadditional $189 million investment from JP Morgan to fund further geographic expansion.Technology is critical to the FreshDirect model, but it’s the collective impact of the firm’s differences whencompared to rivals, this tech-enabled strategic positioning, that delivers success. Over time, the firm has alsobuilt up a set of strategic assets that not only address specific needs of a market but are now extremelydifficult for any upstart to compete against. Traditional grocers can’t fully copy the firm’s delivery businessbecause this would leave them straddling two markets (low-margin storefront and high-margin delivery),unable to gain optimal benefits from either. Entry costs for would-be competitors are also high (the firmspent over $75 million building infrastructure before it could serve a single customer), and the firm’s complex
9/8/22, 9:22 AM2.1 Introduction | Information Systemshttps://scholar.flatworldknowledge.com/books/34828/fwk-38086-ch02_s01/read4/5and highly customized software, which handles everything from delivery scheduling to orchestrating thepreparation of thousands of recipes, continues to be refined and improved each year. On top of all this comesyears of relationship building with suppliers, as well as customer data used to further refine processes, speedreorders, 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 supermarketsin New York City than when FreshDirect first opened for business.Better than Grocers, but Other Rivals?The FreshDirect model is superior to conventional grocery stores in just about every way, and thefirm has devastated the competition while delivering on quality, selection, and value. However, onethreat successful firms face is the potential entry of even better-funded, growth-seeking rivals to tryto squeeze them out of the current market. And many of these firms have profitable, non-grocerycore businesses that can fund a costly fight to try to win FreshDirect customers. For years, the kingof e-commerce, Amazon, has had its eye on tapping the $700 billion market for grocery retail. Thefirm purchased Whole Foods and is integrating the chain into Amazon offerings; the firm’s AmazonGo cashier-less shops have moved beyond the experimental stage and are now within reach ofFreshDirect’s New York City customers; and the firm bought a massive Northern New Jerseydistribution center formerly owned by grocer PathMark. Estimates suggest the facility may be ableto move ten times the dollar volume of FreshDirect’s new Bronx distribution center. Amazon alsooffers same-day delivery free to Amazon Prime subscribers, prompting FreshDirect to roll out asame-day service in many markets, as well as FoodKick, for a smaller selection of curatedproducts, takeout alternative semi-prepared foods, and beer and wine. Even more troubling: manydelivery items are cheaper from Amazon Fresh than from FreshDirect (a firm once known for its lowprices, but now seen as a premium price for premium quality supplier). And Amazon Fresh can alsodeliver many of the non-grocery items you can order on Amazon’s main website. Walmart is alsocrowding in on FreshDirect’s turf. It’s opened up its own Bronx-based food-focused warehouse.Kroger, the largest pure-play grocery in the U.S. (Walmart is biggest overall), has purchased abigger stake in British online grocer Ocado and plans to use the firm’s tech to automatewarehouses and process online orders. There are other players in the market, too, includingInstacart, which leverages a network of Uber-style contract delivery workers to pick groceries frompopular retailers that include Whole Foods and Costco. Google has experimented with a similar,now shuttered service known as Google Express. And the rise of meal kit delivery firms, such asBlue 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 shoppingexperience and an uneven selection. These are problems a well-funded and patient giant may be
9/8/22, 9:22 AM2.1 Introduction | Information Systemshttps://scholar.flatworldknowledge.com/books/34828/fwk-38086-ch02_s01/read5/5able to iron out over time. But FreshDirect’s shift to the new Bronx facility also came with high-techhiccups, prompting the firm to beef up customer service and launch a “Direct to David” feedbackline to the CEO if problems persisted. In an effort to prevent previously satisfied customers fromtrying a rival and risk churning out, FreshDirect will even send a person over via Uber rather thanrisk a botched order that will sour satisfaction. It’s unclear if FreshDirect’s initial advantages willhold up over time. FreshDirect’s technology, customer base, and supplier savvy make it anattractive acquisition for grocery giant Ahold Delhaize and we’ll see if the firm’s new sponsor willenhance 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 spectacularly, and wecontinue to see strong growth in this environment.”
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