6.1 FreshDirect Defies the Critics

Critics have been dubious about the potential for online grocers since the demise of Webvan, one of the first online grocers, in 2001. FreshDirect (www. freshdirect.com), an online grocer, has been catering to time-pressed and finicky gourmets since its trucks began rolling through the streets of New York City in 2002. The company now sells $200 million worth of food every year. It shipped 2 million orders of 60 million items packed into 8 million boxes in 2006. One-quarter of its 10,000 items are customizable (for example, pick your steak's thickness). The company assembles each day's orders between 11 P.M. and 11 A.M., and most of the trucks must depart by 1 P.M. to meet delivery schedules. So, how does FreshDirect survive? The answer is through relentless attention to logistics and costs. FreshDirect is one of a very few online grocers to have survived the dot-com collapse, along with Peapod (www.peapod.com), now a unit of Dutch grocer Royal Ahold, and SimonDelivers (www.simondelivers.com) in the Minneapolis area. FreshDirect is constantly cutting costs. Since its inception, the company has increased its item accuracy by three-tenths of a point, to 99.9 percent. Item accuracy refers to the number of correct items that the grocer delivers to its customers. That figure represents $1.1 million in savings. In another example, a telephone ringing at FreshDirect means that a customer has received the wrong order, does not like the look of his salmon filets, or is angry because the order arrived late. Every time that one of FreshDirect's customer-service representatives picks up the phone, it costs the company $3.50, plus the cost of crediting wrong items. The company's early days were a struggle. It took FreshDirect three years to sufficiently tune its software and sorting systems so that it could make its first deliveries. Finally, in 2005, FreshDirect turned its first profit. FreshDirect's continued success depends on product quality, logistics, and continued cost-cutting. The company worries about things as minuscule as the number of times an item is scanned before it gets to the packing station. There, workers take items off a conveyor, scan them, and put them in a cardboard box. If the wrong item gets sent to the packers by mistake, a runner exchanges it, holding up the order and possibly the entire refrigerated truck. The company has invested in additional scanners so that items are scanned three times before they reach the box, providing extra opportunities to catch mistakes. The additional 50 cents it costs to find an error is much less than the $6 or so it would cost if the error slipped through. FreshDirect's 150 drivers must meet the two-hour window the company promises customers. Manhattanbound drivers have to know the intricacies of service elevators, parking spots, and difficult building superintendents. That's why new drivers deliver 35 percent fewer orders than experienced ones. The company's software helps its drivers accomplish these goals. The software places more orders on experienced drivers' trucks and places orders in adjacent locations on the same truck for added efficiency. During rush hour, the FreshDirect software limits the number of delivery slots it offers, instead dispatching a bigger truck to serve as a base for deliverymen pushing handcarts to customers' apartments. Sources: Compiled from C. Schoenberger, "Will Work with Food," Forbes, September 18, 2006; "NetTracker Web Analytics Software Delivers Web Site Marketing, Merchandising, and Usability Analysis to FreshDirect," www.zdnet.com, May 4, 2006; L. Dignan, "FreshDirect: Ready to Deliver," Baseline Magazine, February, 2004; www.freshdirect.com, accessed May 13, 2007.

QUESTIONS 1. Look up articles on Webvan and find the various reasons for its failure. Compare and contrast Webvan and FreshDirect to determine the reasons for FreshDirect's success. Speculate as to whether FreshDirect can continue to thrive. 2. Apply Porter's competitive forces model to FreshDirect. Discuss each of the five forces as it applies to FreshDirect. 3. What else could FreshDirect do with its Web site to attract and retain customers? Hin