2019 started out difcult for FreshDirect. Although FreshDirect's website read, \"We're on a mission to deliver quality beyond question and convenience that adds something great to your day,\" customers in its primary locationNew York Citytook it to the media the past year to report their dissatisfaction with the company. Due to persistent technical glitches, some customers in Manhattan received emails telling them none of the items they had ordered were available, a problem the company later attributed to a software upgrade gone awry. \"I used to spend an average of $700 a month with you,\" wrote Ingrid Rose on the company's Facebook page. \"But service has been so bad, I hardly ever order anymore. I used to be a super fan and I miss what you used to be.\"1 These issues even caused longtime chief executive and co- founder, Jason Ackerman, to step down from his role. Following the opening of FreshDirect's new facility based in the South Bronx, New York City, cofounder David Mclnerney took over in September 2018 as CEO. \"This is a very exciting time for the company as we settle into our new home. I look forward to working with the entire FreshDirect team as we usher the company into this next chapter of growth,\" said McInerney in an interview. Considering its current track and what its customers are saying, will the company be able to deliver quality beyond question without actually delivering its products? Since 2001, operating out of its production center in Long Island City, Queens, FreshDirect had offered online grocery shopping and delivery service in Manhattan, Queens, Brooklyn, Nassau County, Riverdale, Westchester, select areas of Staten Island, the Bronx, the Hamptons, New Jersey including Jersey Shore, Philadelphia, Delaware, and parts of Connecticut. FreshDirect also offered pickup service at its Long Island City facility, as well as corporate service to select delivery zones in Manhattan and summer delivery service to the Hamptons on Long Island. In 2012, the company decided to move its facility from Long Island City, Queens, to a new 800,000-square-foot property in the Bronx, and received court clearance to do so. FreshDirect had threatened to relocate its operational hub and headquarters to New Jersey, but New York City and the state of New York offered close to a $130 million subsidy package, including tax breaks and abatements, to keep the online grocer in New York City. A petition by the community group South Bronx United had earlier challenged the move arguing that the city had failed to analyze properly the potential environmental impact (e.g., air and noise pollution) that would result from a \"truck intensive\" business. However, the court ruled in FreshDirect's favor in 2013.2 v During the early years of the company, FreshDirect had pronounced to the New York City market that it was \"the new way to shop for food. This was a bold statement given that the previous decade had witnessed the demise of numerous online grocery ventures. However, the creators of FreshDirect were condent in the prospects for success of their business. Their entire operation had been designed to deliver on L one simple promise to grocery shoppers \"higher quality at lower prices.\" While this promise was an extremely common tagline used within and outside the grocery business, FreshDirect had integrated numerous components into its system to give real meaning to their words. Without a retail location, FreshDirect did not have to pay expensive rent fo a retail space. To offer the highest-quality products to its customers, FreshDirect had designed a state-of-theart production center and staff: it with expert personnel. The 600,000-square-foot production facility newly located in the Bronx opened in 2018. In each FreshDirect warehouse, 12 separate temperature zones ensured that each piece of produce, meat, and other food was kept at its optimal temperature for ripening and/ or preservation. The company claimed the entire facility was kept colder and cleaner than any other retail environment.3 Further quality management was achieved by an SAP manufacturing software system that controlled every detail of the facility's operations All of the thermometers, scales, and conveyor belts within the facility were connected to a central command center. Each specic setting w programmed into the system by an expert from the corresponding department of everything from the ideal temperature for ripening a cantaloupe to the amount of our that went into the French bread. The system was equipped with a monitoring alarm that alerted staff to any deviation from the programmed settings. FreshDirect maintained extremely high standards for cleanliness, health, and safety. The oor was immaculate. All foodpreparation areas and equipment were bathed in antiseptic foam at the end of each day. Incoming and outgoing food was tested in FreshDirect's inhouse laboratory, which ensured adherence to USDA guidelines and the Hazard Analysis and Critical Control Point food safety system. In all respects, food passing through the FreshDirect facility met the company's high health and safety standards.4 System efficiency was the key to FreshDirect's ability to offer its high-quality products at low prices. The middleman was completely eliminated. Instead of going through an intermediary, both fresh and dry products were ordered from individual growers and producers anc shipped directly to FreshDirect's production center, where its expert staff prepared them for purchase. In addition, FreshDirect did not accept any slotting allowances.5 This unique relationship with growers and producers allowed FreshDirect to enjoy reduced purchase price: from its suppliers, passing the savings on to its customers. Each department of the facility, including the coffee roaster, butcher, and bakery, was staffed by carefully selected experts. FreshDirect C 2 offered premium fresh coffees (roasted on site), pastries and breads (baked on site), deli, cheese, meats (roast beef dry-aged on site), and seafood. Perishable produce was FreshDirect's specialty by buying locally as much as possible and using the best sources of the season, it was able to bring food the shortest distance from farms, dairies, and sheries to the customer's table. FreshDirect catered to the tastes of its busy Manhattan clientele by offering a full line of heat-and-serve meals prepared in the FreshDirect kitchen by New York executive chef Michael Stark (formerly of Tribeca Grill) and his team. Another celebrity chef, Terrance Brennan of New York's French-Mediterranean restaurant Picholine, oversaw creation of \"restaurant-worthy\" four-minute meals. Made from raw ingredients delivered in a \"steam valve system\" package, these complete meals were not frozen but were delivered ready to cook in a microwave. The proximity of FreshDirect's processing facility to its Manhattan customer base was a critical factor in its cost-effective operational design. The processing center's location in the South Bronx put approximately 4 million people within a 10-mile radius of FreshDirect, enabling the rm to quickly deliver a large volume of orders.6 Further, cost controls had been implemented through FreshDirect's order and delivery protocols. Products in each individual order were packed in boxes, separated by type of item (meat, seafood, and produce packed together; dairy, deli, cheese, coffee, and tea packed together; grocery, specialty, and nonrefrigerated products packed together), and placed on a computerized conveyor system to be sorted, assembled, and loaded into a refrigerated truck for delivery. Orders had to be a minimum of $40, with a delivery charge between $6.99 and $7.99 per order, depending on the order dollar amount and delivery location. Delivery was made by one of FreshDirect's own trucks and was available only during a prearranged two-hour window from 6:30 a.m. to 10 pm. every day of the week. To attract more customers and to encourage repeat purchases, FreshDirect also offered DeliveryPass that enabled customers to get unlimited free deliveries by purchasing a free delivery subscription for 6 or 12 months. The DeliveryPass price for 6 months was $79 and for 12 months was $129. Competing with other online grocers like AmazonFresh, specialty gourmet/gourmand stores in Manhattan, and high-end chain supermarkets like Whole Foods, Trader Joe's, and Fairway, FreshDirect was trying to woo the sophisticated grocery shopper with an offer of quality, delivered to the customer's door, at a price more attractive than others in the neighborhood. Operating in the black for the rst time in 2005,7 by choosing to remain a private company and expanding gradually, FreshDirect's owners hoped to turn a daily prot, steadily recovering the estimated $60 million start-up costs, silencing critics, and winning converts.8 An interesting idea for expansion was to cater to home cooks who liked to cook from scratch. FreshDirect teamed up with online recipe wehqite. andilv tn lmmnh 2 new cervine, called Prmnnrt llqerc nmilri order deliveries nf' fnmi ingredients directlv annlinahle tn rmline renineq The Internet was a popular recipe source for home cooks, but shopping for ingredients was widely seen as an unpleasant chore. The new Popcart technology alleviated this burden by linking with the FreshDirect portal and providing next-day deliveries of whatever a recipe called for. This is really at the heart and soul of making food shopping easier for consumers. \"About 70 percent of New Yorkers cook from scratch multiple times per week, and 30 percent cook multiple times per day. Think about that opportunity,\" said Jodi Kahn, chief consumer oicer for FreshDirect.9 Founding Partners Cofounder and its rst chief executive ofcer Joseph Fedele was able to bring a wealth of experience in New York City's food industry to FreshDirect. In 1993 he had co-founded Fairway Uptown, a 35,000square-foot supermarket on West 133 Street in Harlem. Many critics originally questioned the success of a store in that location, but Fairway's low prices and quality selection of produce and meats made it a hit with neighborhood residents, as well as many downtown and suburban commuters. Cofounder Jason Ackerman, FreshDirect's vice chairman and chief nancial officer, had gained exposure to the grocery industry as an investment banker with Donaldson Lufkin & J enrette, where he specialized in supermarket mergers and acquisitions. Fedele and Ackerman rst explored the idea of starting a large chain of fresh-food stores, but they realized maintaining a high degree of quality would be impossible with a large enterprise. As an alternative, they elected to pursue a business that incorporated online shopping with central distribution. Using the failure of Webvan, the dot-com delivery service that ran through $830 million in ve years of rapid expansion, as their example of what not to do, Fedele and Ackerman planned to start slowly, use off-theshelf software and an automated delivery system, and pay attention to essentials such as forming relationships with key suppliers and micromanaging quality control.10 FreshDirect acquired the bulk of its $100 million investment from several private sources, along with the contribution that was expected to come from the state of New York in tax breaks. By locating FreshDirect's distribution center within the state border and promising to create at least 300 permanent, full-time, private-sector jobs in the state, FreshDirect became eligible for a $500,000 training grant from the Empire State Development Jobs Now Program. As its name implied, the purpose of the Jobs Now program was to create new, immediate job opportunities for New Yorkers. CEO Successions Although the press was mostly positive about FreshDirect's opportunities, growth and operational challenges remained. In the words of an ex-senior executive of FreshDirect, "The major problem seems to be constant change in Senior Management." FreshDirect co-founder Joseph Fedele had remained CEO until January 2004, when co-founder Jason Ackerman succeeded him. Ackerman served as CEO of FreshDirect for a little over seven months; Dean Furbush succeeded him in September 2004. Ackerman remained vice chairman and chief financial officer. The tenure of Dean Furbush lasted a little over two years. Steve Michaelson, president since 2004, replaced Furbush as CEO of FreshDirect in early 2007. In 2008, Michaelson left for another firm and FreshDirect's chairman of the board, Richard Braddock, expanded his role in the firm and took over as CEO. Braddock said, "I chose to increase my involvement with the company because I love the business and I think it has great growth potential." Braddock had previously worked at private equity firm MidOcean Partners and travel services retailer Priceline.com, where he'd also served as chairman and CEO. Braddock wound up leaving the company in March 2011. Jason Ackerman returned to the role of CEO for a second time and stepped down in September 2018 and co-founder David Mclnerney took over. Business Plan While business started out relatively slowly, FreshDirect hoped to capture around 5 percent of the New York City grocery market. Availability citywide was originally slated for the end of 2002. However, to maintain its superior service and product quality, FreshDirect chose to expand its service area slowly. This business model seemed to be working well for FreshDirect, as the company continued to gradually expand successfully into new areas surrounding its Long Island City facility. With the success of its business model and its steady growth strategy, by the spring of 2011, FreshDirect had delivery available to select zip codes and neighborhoods throughout Manhattan and as far away as Westchester, Connecticut, New Jersey, and the Hamptons on Long Island (in the summer only). By 2019, FreshDirect was serving Delaware, Jersey Shore, Hamptons, Connecticut, and some cities in Pennsylvania. They started serving in and around Center City in Philadelphia in 2017. The company employed a relatively low-cost marketing approach, which originally consisted mainly of billboards, public relations, and word of mouth to promote its products and services. FreshDirect hired Trumpet, an ad agency that promoted FreshDirect as a better way to shop by emphasizing the problems associated with traditional grocery shopping. For example,one commercial stressed the unsanitary conditions in a supermarket by showing a shopper bending over a barrel of olives as she sneezed, getting an olive stuck in her nose, and then blowing it back into the barrel. The advertisement ended with the question: \"Where's your food been?\" Another ad showed a checkout clerk morph into an armed robber, demand money from the customer, and then morph back into a friendly checkout clerk once the money was received. The ad urged viewers to \"stop getting robbed at the grocery store.\"14 FreshDirect enlisted celebrity endorsements from New York City personalities such as lm director Spike Lee, actress Cynthia Nixon, former mayor Ed Koch, supermodel Paulina Porizkova, and chef Bobby Flay.15 The company planned to change its marketing strategy by launching a new testimonialbased campaign using actual customers, rather than celebrities. FreshDirect was number 81 in the Internet Retailer Top 500 Guide of 2018. Operating Strategy Building on its eicient low-cost supply chain that eliminated the middleman and sourced direct from farms and sheries, FreshDirect was able to pursue a make-to-order philosophy. 16 By focusing on providing produce, meat, seafood, baked goods, and coffees that were selected or made to the customer's specic order, FreshDirect offered its customers an alternative to the standardized cuts and choices available at most brick-and-mortar grocery stores. This strategy created a business model that was unique within the grocery business community. A typical grocery store carried about 25,000 packaged goods, which accounted for approximately 50 percent of its sales, and about 2,200 perishable products, which accounted for the other 50 percent of sales. In contrast, FreshDirect offered about 5,000 perishable products, accounting for approximately 75 percent of its sales, but only about 3,000 packaged goods, which made up the remaining 25 percent of sales.17 While this stocking strategy enabled a greater array of fresh foods, it limited the brands and available sizes of packaged goods such as cereals, crackers, and laundry detergents. However, FreshDirect believed that customers would accept a more limited packagedgood selection in order to get lower prices, as evidenced in the success of wholesale grocery stores, which offered bulk sales of limited items. Jason Ackerman identied the ideal FreshDirect customers as those who bought their bulk staples from Costco on a monthly basis and bought everything else from FreshDirect on a weekly basis.13 FreshDirect's Website FreshDirect's website not only offered an abundance of products to choose from but also provided a broad spectrum of information on the food that was sold and the manner in which it was sold (see Exhibit 1). Web surfers could take a pictorial tour of the FreshDirect facility; get background information on the experts who managed each department; get nutritional information on food items; compare produce or cheese on the basis of taste, price, and usage; specify the thickness of meat or seafood orders and opt for one of several marinades or rubs (see Exhibit 2); search for the right roast and variety of coee according to taste preferences; and read nutritional information for fully prepared meals. A large selection of recipes was available depending on the items chosen. C3 EXHIBIT 1 FreshDirect Website _ N w Y {k (10038 Hl' 0.00 4d DFHCE ' Dilivfry Times >v Sign in v '0 23.1 v ~freshdl'rect ...... a 0...... AT THE OFFICE HOT COLD FRESH DAIRY SNACKS MEALS MEEHNGPLA'I'IERS BEVERAGES BEVERAGES BEERMJIDER WINES&SPIRITS PANTRY SUPPLIES SPECIALGIFT H 01 FOR NEW , CUSTOMERS FREE CHOBANI FOR 3 MONTHS JUST ADD ITFM v i ,J 0 Employee Gift\" Ofce Favorites > TO CART AND USE LOCALLY SOURCED WILK CODE FRESHGIFT* SAVE ON AT CHECKOUT. Chobani SNACKS & SIPS. Greek Yogurt with LaCnoise Source: freshdirect.com EXHIBIT 2 Example of FreshDirect Seafood Selection freshdirect fd OFFICE FOODKICK New York (10038) Delivery Times V Hi! Sign in $0.00 Cart V freshdirect. Search Q Contact Us Help Reorder Create Account MEALS FRUIT VEGETABLES MEAT & SEAFOOD DAIRY DELI & BAKERY & PARTY PASTRY GROCERY FROZEN BEER WINES & POULTRY CHEESE PLATTERS SPIRITS FRESH DEALS COUPONS SALE NEW TOP-RATED BLOG LOCAL MONTH OF LOVE Learn more About Us, or get Grocery Delivery info. FREE Grass-Fed Local Ground Beef LIMITED SUPPLY CLAIM YOURS with your order of $99 or more. LASAGNA: 2/530 Freshest FAST FAMILY DINNERS> BREAKFAST WINNERS> Groceries % OFF Delivered to your door UP TFor example, if you wanted to purchase chicken, you were rst asked to choose from breasts and cutlets, cubes and strips, ground, legs and thighs, specialty parts, split and quartered, whole, or wings. Once your selection was made let's say you chose breasts and cutlets you were given further options based on your preference for skin, bone, and thickness. The nal selection step offered you a choice of rubs and marinades, including teriyaki, sweet and sour, garlic rosemary, poultry seasoning, lemon herb rub, and salt-andpepper rub. Throughout, the pages offered nutritional proles of each cut of meat as well as tips for preparation and storage. As for FreshDirect's several delivery models, customers within the city were attracted to the FreshDirect service (prearranged two-hour delivery window) because it eliminated the need to carry groceries or park a car near their apartments to unload their purchases. Suburban customers were served in a slightly different manner. Many suburban customers worked at corporations in the tristate area that could arrange for depot drop-off in the oice parking lot, creating a central delivery station. FreshDirect sent a refrigerated truck, large enough to hold 500 orders, to these key spots during designated times. Suburbanites, leaving their ofce building to go to their cars, swung by the FreshDirect truck, picked up their orders, and headed home. FreshDirect could also provide delivery to the parking lot of football or concert events for tailgate parties or picnics. Customers could also pick up their orders directly from the processing center. Orders were ready at the pickup desk 5 to 10 minutes after they were called in. For business customers in Manhattan, chef-prepared breakfast and luncheon platters and restaurant-quality individual meals were delivered right to the ofce. FreshDirect offered catering for business meetings and upscale events. FreshDirect provided dedicated corporate account managers and customer service representatives for corporate clients; however, FreshDirect provided only delivery, not setup and platter- arrangement services. The corporate delivery minimum order was $50, and delivery costs were $14.99 (see Exhibit 3). EXHIBIT 3 FreshDirect at the Office New York (10038) Hi! $0.00 freshdirect fd. OFFICE FOODKICK Delivery Times Sign in V Cart V freshdirect Search Q Contact Us Help Reorder Create Account AT THE OFFICE FRESH DAIRY SNACKS MEALS MEETING PLATTERS HOT COLD BEVERAGES BEVERAGES BEER & CIDER WINES & SPIRITS PANTRY SUPPLIES SPECIAL GIFT Chobani. flip FOR NEW MOND COCO LOCO. CUSTOMERS Employee Appreciation Day> Fruit They'll Love> FREE CHOBANI LOCALLY SOURCED MILK FOR 3 MONTHS Chobani Greek Yogurt with Strawberry on the Bottom JUST ADD ITEM GAS Employee Gifts> Office Favorites > TO CART AND USE LOCALLY SOURCED MILK CODE FRESHGIFT* SAVE ON AT CHECKOUT. Chobani SNACKS & SIPS. Greek Yogurt with Blueberry le Croix REDEEM NOW ca the Bottom flipThe Retail Grocery Industry In the United States, supermarket chains make over $632 billion in sales annually. The typical supermarket carries 39,500 items, averages about 42,800 square feet, and enjoys over $18 million in sales annually. The top 10 supermarket chains in the United States command a large share of the total grocery industry business (see L Exhibit 4). EXHIBIT 4 Top 10 North American Food Retailers, 2018 Supermarket Chain 2018E Sales CAGR" 2013-2018E Sales CAGR 2018E-2023E Wal-Mart $261,153.28 3.6% 2.3% The Kroger Co. $104,269.58 7.8% 2.7% Walgreens Boots Alliance 602 118.72% 4.9% CVS $80,172.45 4.8% 2.9% Costco Wholesale Club $61,625.82 6.8% 5.2% Albertsons Cos. $54,291.08 24.6% 1.4% Ahold Delhaize $39,968.46 -0.3% 1.1% Publix $34,676.38 4.3% 1.6% Target Corp. $30,873.13 -1.0% -2.9% Aldi $28,835.43 8.9% 6.6% "Estimated *Compound annual growth rateThe supermarket business is a low-margin business with net prots of only 1 to 2 percent of revenues. Store prots depend heavily on high customer trafc and rapid inventory turnover, especially for perishables such as produce and meat. Competitors must operate elciently to make money, so tight control of labor costs and product spoilage is essential. Because of modest capital investment of mainly construction of distribution centers and stores, supermarket chains realize 15 to 20 percent returns on invested capital. Online grocery retailers, like FreshDirectbecause of the exibility of information control, automated order fulllment, and reduced real estate costscould potentially have operating margins up to 10 percent, rather than the 3 to 4 percent of traditional supermarkets.20 The Online Grocery Segment 1.21 Total online grocery shopping sales were estimated to be about $29.7 billion in 202 This accounted for about 4.4 percent of total grocery sales. Online grocery shopping was slow to catch on in the 1990s, and industry newcomers had encountered high start-up and operating C 32 costs. Sales volumes and prot margins remained too small to cover the high startup costs. The problem, according to industry analysts, was that consumers had been disappointed in online service, selection, and prices. Coupled with the extensive investment needed in warehousing, fulllment, and inventory control, this meant the \"pure play\" e-grocery models were risky. There was a belief then that better success would come from traditional grocery retailers that chose to venture online.22 However, some analysts expected online grocery sales to grow at a rapid pace as companies improved their service and selection, computer penetration of households rose, and consumers became more accustomed to making purchases online.23 An article in Computer Bits examined the customer base for online grocers, looking specically at the types of consumers who would be likely to shop online and the kinds of home computer systems that were required for online shopping. An Andersen Consulting report identied six major types of online shoppers (see Exhibit 5), and FreshDirect's Richard Braddock predicted that online grocery sales could account for as much as 20 percent or more of total grocery sales within the next 10 years.24 A MARC Group study concluded, \"Consumers who buy groceries online are likely to be more loyal to their electronic supermarkets, spend more per store 'Visit,' and take greater advantage of coupons and premiums than traditional customers.\"25 EXHIBIT 5 Types of Online Shoppers and Their Propensity to Be Attracted to Online Grocery Shopping Types of Online Shoppers Comments Traditional Might be older technologyavoiders or simply shoppers who like to snifftest their own produce and eyeball the meat selection. Responsible Feed off the satisfaction of accomplishing this persistent todo item. Timestarved Find the extra costs associated with delivery fees or other markups a small price to pay for saving time. New technologists Use the latest technology for any and every activity they can, because they can. Necessity users Have physical or circumstantial challenges that make grocery shopping difficult; likely to be the most loyal group of shoppers. Avoiders Dislike the grocery shopping experience for a variety of reasons. Source: Andersen Consulting. A problem with online grocery shopping was that consumers were extremely price-sensitive when it came to buying groceries, and the prices of many online grocers at the outset were above those at supermarkets. Shoppers also were unwilling to pay extra to online grocers for home delivery. Consumer price sensitivity meant that online grocers had to achieve a cost structure that would allow them to (1) price competitively, (2) cover the cost of selecting items in the store and delivering individual grocery orders, and (3) have sufcient margins to earn attractive returns on their investment. Some analysts estimated that to be successful, online grocers had to do 10 times the volume of a traditional grocer.26 Potential Competitors in the Online Grocery Segment When online grocers started appearing within the industry, many established brickandmortar grocers began oering online shopping in an attempt to maintain and expand their customer base. Two basic models were used for online order fulllment: (1) pick items from the shelves of existing stores within the grocer's chain, and (2) build special warehouses dedicated to online orders. The demand for home delivery of groceries had been increasing, but in many market areas the demand had not reached a level that would justify the high cost of warehouses dedicated to fullling online orders.27 Safeway began an ambitious online grocery venture, GroceryWorks, a shopping system that included warehouses dedicated to lling online orders. Unfavorable returns forced Safeway to reevaluate its system, and it eventually chose to form a partnership with Tesco, a U.K.based grocer. Tesco lled its online orders from the shelves of local stores in close proximity to the customer's home. Safeway and Tesco worked together on GroceryWorks in Portland, Oregon, where they received a positive initial response from customers.28 The craze over health food had created room in the grocery industry for organic-food suppliers to enter as an attractive substitute to traditional groceries. When asked what kept him up at night, FreshDirect's former CEO Dean Furbush said that Whole Foods or Trader Joe's moving into a FreshDirect neighborhood was his biggest threat, as that hurt FreshDirect the most. Whole Foods, the Austin, Texas-based supermarket chain subsidiary of Amazon with the organic-health-food focus, had already threatened FreshDirect's sales in Manhattan. Trader Joe's, another specialty food retailer, was opening a store in downtown Union Square, prime territory for FreshDirect.29 Although commentators believed there was enough room for all, including even street farmers' markets, FreshDirect focused on organic foods to respond to the threats of Whole Foods and other specialty food stores.30 With the shift among some customers to paying attention to local, sometimes organic, suppliers, FreshDirect highlighted its support of and partnership with the local companies that provided their produce, poultry, sh, cheese, milk, eggs, and specialties such as wine (see Exhibit 6). However, its efforts were inconsistent in this area. For example, to help shoppers and checkout operators distinguish between organic and nonorganic produce, FreshDirect wrapped organics in plastic, which in itself is not organic. FreshDirect chairman Jeff Turner recognized the incongruity.31 EXHIBIT 6 FreshDirect Local Market Offerings MEALS FRUIT VEGETABLES MEAT & SEAFOOD DAIRY DELI & BAKERY & PARTY WINES & POULTRY CHEESE PASTRY PLATTERS GROCERY FROZEN BEER SPIRITS FRESH DEALS COUPONS SALE NEW TOP-RATED BLOG LOCAL HEALTHY EATS LOCAL Local Baked Goods Cheese Dairy & Juice Local IRVING MOCHA Fruit COFFEE . FARM . Meat & Poultry JAVA Pasta & Entrees SHOP NOW RIPE BLACKBERRY, Seafood PLUM, WARM HONEY HYDRATE YOUR DAY Zico Specialties & Beer EL SALVADOR danivavn BOXCYN SHOP NOW Vegetables ROASTING COMPANY Wine & Spirits Vegetables Fruit Dairy & Juice Cheese Seafood Source: FreshDirect Company Website In 2019, FreshDirect saw four major players entering the online grocery market chipping into its NYC market share. With almost 9 million people packed into five boroughs of gridlocked traffic and subway chaos, no U.S. city is more suited to online grocery shopping than New York. Amazon Fresh, Walmart's Jet.com, Peapod, and YourGrocer.com were competing against FreshDirect in the NYC market.Rivals in the NYC Online Grocery Segment Jet.com After Acquiring Jet.com in 2016, Walmart's goal was to target urban areas like New York with high concentrations of affluent millennials, retailers' coveted demographic.Jet.com was launched in 2014 by Marc Lore along with Mike Hanrahan and Nate Faust; It is headquartered in Hoboken, New Jersey. Walmart then acquired Jet.com in 2016 with a goal to revamp and rebrand Jet.com in an effort to "rehumanize" e-commerce (see [ Exhibit 7). Apart from offering groceries and perishable products in specific areas, Walmart has made several acquisitions of fashion and apparel brands including Bonobos, ModCloth, ShoeBuy, and Moosejaw, which will be sold on the Jet.com site. Jet, which continues to operates as a standalone site, gives Walmart the opportunity to sell upscale brands and reach higher- income customers who wouldn't normally consider shopping at Walmart. 33 EXHIBIT 7 Jet.com Website Jet Departments Search Q Shop curated brands and city essentials, all in one place Grocery & Home Fashion Electronics Featured Shops Household Complete your space with Refresh your spring Give yourself an upgrade Feedback From snacks to essentials, modern furniture and wardrobe with the latest with high-performance Spring Beauty > decor. trends. tech. find your favorites. The Nike Shop > Deals & Promotions > dang Clean Living New From adidas > Spring Clearance >Most importantly, Walmart's acquisition of the same-day delivery start-up, Parcel gives Walmart a second front against Amazon. Jet.com, which had been offering only two-day free shipping, will allow most New York customers to schedule three-hour windows for same-day or next-day delivery. C 34 Peapod Founded in 1989 by brothers Andrew and Thomas Parkinson, Peapod was an early pioneer in e-commerce, inventing an online home- shopping service for grocery items years ahead of the commercial emergence of the Internet. With its tagline "Smart Shopping for Busy People," the company began providing consumers with a home-shopping experience in the early 1990s, going so far as to install modems in customer homes to provide an online connection. From its founding in 1989 until 1998, the company's business model involved filling customer orders by forming alliances with traditional grocery retailers. The company chose a retail partner in each geographic area where it operated and used the partner's local network of retail stores to pick and pack orders for delivery to customers. Peapod personnel would cruise the aisles of a partner's stores, selecting the items each customer ordered, pack and load them into Peapod vehicles, and then deliver them to customers at prearranged times. Peapod charged customers a fee for its service and collected fees from its retail supply partners for using their products in its online service. In 1997, faced with mounting losses despite growing revenues, Peapod management shifted to a new order-fulfillment business model utilizing a local company-owned central distribution warehouse to store, pick, and pack customer orders for delivery. By mid-1999 the company had opened new distribution centers in three of the eight markets it served-Chicago, Long Island, and Boston-and a fourth distribution center was under construction in San Francisco. In late spring 2000, Peapod created a partnership with Royal Ahold, an international food provider based in the Netherlands. At the time, Ahold operated five supermarket companies in the United States: Stop & Shop, Tops Market, Giant-Landover, Giant-Carlisle, and BI-LO. In September 2000, Peapod acquired Streamline.com Inc.'s operations in Chicago and the Washington, DC, markets and announced that it planned to exit its markets in Columbus, Ohio, and in Houston, Dallas, and Austin, Texas. All of these moves were made as part of Peapod's strategic plan for growth and future profitability. Under Peapod's initial partnership agreement with Ahold, Peapod was to continue as a standalone company, with Ahold supplying Peapod's goods, services, and fast-pick fulfillment centers. However, in July 2001 Ahold acquiredall the outstanding shares of Peapod and merged Peapod into one of Ahold's subsidiaries. Peapod offered delivery services from its own warehouses to many areas, including Chicagoland, Milwaukee and southeast Wisconsin, and Indianapolis. Peapod by Stop & Shop provided delivery services in southern New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, and New Jersey. And Peapod by Giant provided delivery services to Maryland, Virginia, Philadelphia and southeastern Pennsylvania, and Washington, DC. 34 In large markets, orders were picked, packed, loaded, and delivered from a freestanding centralized fulfillment center; in smaller markets, Peapod established fast-pick centralized fulfillment centers adjacent to the facilities of retail partners.Peapod's proprietary transportation routing system ensured on-time delivery and efficient truck and driver utilization. AmazonFresh AmazonFresh entered the grocery market in recent years by offering a wide range of dry goods. Amazon was always a threat to other online retailers because of its existing loyal customer base and legendary customer service. The selection of dry goods rather than perishables meant that Amazon, unlike FreshDirect and Peapod, did not have to worry about delivery costs on time- and climate-sensitive items. AmazonFresh serviced residences in Boston, Baltimore, Dallas, Chicago, New York City, London, parts of California and New Jersey, and more. Recently, users in states like Pennsylvania, Maryland, Virginia, and California have reported that AmazonFresh no longer delivers to their zip code. AmazonFresh offered over 95,000 different items available for same day delivery if ordered before 10 a.m. and next day early morning delivery for items ordered between 10 a.m. and 10 p.m. The company had difficulty managing the economics of the grocery delivery business, and it kept membership prices considerably higher than competitors. To become an AmazonFresh member, a customer had to subscribe to Prime Fresh in addition to the subscription of Amazon Prime with a total annual cost of about $299. In contrast, FreshDirect and Peapod charged customers for delivery of the goods purchased, without requiring customers to pay subscription charges. Still, AmazonFresh remains a vigorous competitor in the online grocery sector with a proven history of success in online retail. All the existing and rising competition amid growth in online grocery stores threatens FreshDirect's future profitability (see Exhibits 8 and [[ 9).EXHIBIT 8 Profiles of Select Online Grocers Delivery Minimum Area Order Delivery Name Covered Minimum Charge Method Specialization FreshDirect Manhattan, $40 $6.99-$7.99, Trucks; . Mostly perishables: fresh produce, Queens, Brooklyn, depending on delivers every day 6:30 a.m. meats, baked goods Staten Island, the order Bronx, size and to 10 p.m. . Low prices because there is no Nassau County, destination; depending on middleman Westchester tipping location County, Fairfield optional County, Hoboken, Philadelphia, Jersey City YourGrocer Manhattan, the None $9.95 for Rented vans; . Bulk orders of packaged goods Bronx, orders > delivers Westchester, $75; $14.95 9 a.m. to 9 Greenwich, for p.m. Brooklyn, Queens, orders