FreshDirect: Ready To Deliver

By Larry Dignan Print this article Print

Is online grocer FreshDirect about to succeed where Webvan failed miserably?

IT'S 5:30 A.M. at FreshDirect's warehouse and headquarters in Long Island City, N.Y. It's 40 degrees outside and 38 degrees inside.

Butchers are slicing, dicing and packaging fresh meats in what is essentially a 300,000-square-foot refrigerator, getting orders ready for the online grocer's 73,000 active customers in New York City. Other workers are packing boxes of dry goods and preparing greens.

"Greens" as in apples, peppers, lettuce-and green, insulated plastic crates adorned with the logo of a company called Webvan. Webvan? Yes, Webvan-the dot-com delivery service that ran up a deficit of $830 million in little more than five years before flaming out.

FreshDirect founder (and, until recently, chief executive officer) Joe Fedele bought the crates for eight cents on the dollar in 2001, along with ovens, fryers, kettles and even "one or two" trucks from Webvan as it was beginning to liquidate. His goal: "To acquire assets as cheaply as possible and make something out of them," he says.

Fedele hopes buying on the cheap will help FreshDirect avoid Webvan's fate. In fact, Fedele says FreshDirect turned profitable last month, just 16 months after its September 2002 launch.

Where Webvan planned to roll out rapidly into 26 markets, FreshDirect has concentrated solely on New York City. Where Webvan planned to raise billions to bankroll its ambition, Fresh- Direct is content with about $100 million in venture capital. And where Webvan invested heavily in state-of-the-art automated warehouses to handle 500,000 different products with little human intervention, FreshDirect's points of differentiation are cooks, butchers and the like who personally prepare fresh meat, deli and seafood orders for customers. There is automation at FreshDirect's single distribution center, but only in the background.

Indeed, where Webvan relied heavily on developing its own software and systems to deliver "competitive advantage," Fresh- Direct has not. The company's strategy is to buy applications off the shelf where it can, customize where it has to and scrimp on areas that don't have a direct impact on its business.

For starters, FreshDirect chose SAP's widely used R/3 software for coordinating its warehouse and distribution efforts. Even then, FreshDirect didn't buy all parts of the R/3 system- just those components that allowed it to track inventory, compile financial reports and tag beef, lettuce and other products to fulfill customers' orders.

Not that FreshDirect hasn't stumbled technologically. Initially, FreshDirect hired Blue Martini Software in 2001 to build an "intelligent" Web site that would enable customers to create shopping lists and place orders. But Fedele says that after a "few million" dollars and a year of development were spent on the effort, the company gave up and wound up suing Blue Martini, believing its software didn't live up to its promise. Executives of Blue Martini declined to comment.

In 2003, FreshDirect switched to BEA Systems' Weblogic platform, in its effort to keep track of customer preferences as precise as the ripeness of tomatoes or the desired weight of meat cuts. Even with the change in vendor, the site occasionally crashes under the strain of too much traffic.

Orders also can get bogged down because FreshDirect's SAP system pulls information from the Web site in batches, not as each order is placed. In fact, some information it has collected about customer preferences and the costs of delivering goods is hard to locate, because its disparate components don't exchange data as readily as Fedele would like.

But FreshDirect nonetheless has to thank Webvan for improving its chances at success, beyond the low cost of its green crates. Like Webvan, FreshDirect uses automated carousels and conveyors to bring orders and totes to food-prep workers and packers. It's almost routine technology today because many delivery companies adopted Webvan's approach to conveyor systems, says James Tenser, principal of VSN Strategies, a Tuscon, Ariz.-based consulting firm specializing in retail.

Merely surviving where others failed, however, is no longer good enough for FreshDirect. Fedele says the company's second and third years will be focused on tracking metrics such as profit margins by product, bugs per production line, accuracy of orders and delivery cost per order, as it adds more than 2,500 customers a week.

These statistics can be culled from FreshDirect's SAP system, but reports aren't available until two hours after data is collected. The goal, instead, is to display current results around the clock, to analyze and address wasted effort and save time.

To keep things simple, FreshDirect is trying to perfect the operations of its single distribution facility before expanding further. It is staking its reputation on the freshness of the perishable foods it delivers into Manhattan, through the Midtown Tunnel, which connects the western end of Long Island to the city's richest borough.

That means personal, not just automated, attention to detail. "This industry requires tremendous micromanagement," says Fedele."Food is a discriminating purchase."

FreshDirect's advantage is its ability to cut out middlemen, says Fedele, who also co-founded the Fairway Market, an upscale grocer in Manhattan. FreshDirect cuts its own meat from whole carcasses, roasts its own coffee, develops its own relationships with seafood suppliers and inspects every piece of produce that comes through its doors.

This article was originally published on 2004-02-17
Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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