FreshDirect: Ready To Deliver

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 inwhat is essentially a 300,000-square-foot refrigerator, gettingorders ready for the online grocer’s 73,000 active customersin New York City. Other workers are packing boxes of drygoods and preparing greens.

“Greens” as in apples, peppers, lettuce-and green, insulatedplastic crates adorned with the logo of a company called Webvan.Webvan? Yes, Webvan-the dot-com delivery service thatran up a deficit of $830 million in little more than five yearsbefore flaming out.

FreshDirect founder (and, until recently, chief executiveofficer) Joe Fedele bought the crates for eight cents on thedollar in 2001, along with ovens, fryers, kettles and even “oneor two” trucks from Webvan as it was beginning to liquidate.His goal: “To acquire assets as cheaply as possible and makesomething out of them,” he says.

Fedele hopes buying on the cheap will help FreshDirectavoid Webvan’s fate. In fact, Fedele says FreshDirect turnedprofitable last month, just 16 months after its September2002 launch.

Where Webvan planned to roll out rapidly into 26 markets,FreshDirect has concentrated solely on New York City. WhereWebvan 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 automatedwarehouses to handle 500,000 different productswith little human intervention, FreshDirect’s points of differentiationare cooks, butchers and the like who personallyprepare 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 ownsoftware and systems to deliver “competitive advantage,” Fresh-Direct has not. The company’s strategy is to buy applicationsoff the shelf where it can, customize where it has to and scrimpon 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, compilefinancial reports and tag beef, lettuce and other productsto fulfill customers’ orders.

Not that FreshDirect hasn’t stumbled technologically.Initially, FreshDirect hired Blue Martini Software in 2001 tobuild an “intelligent” Web site that would enable customers tocreate shopping lists and place orders. But Fedele says thatafter a “few million” dollars and a year of development werespent on the effort, the company gave up and wound up suingBlue 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’ Weblogicplatform, in its effort to keep track of customer preferencesas precise as the ripeness of tomatoes or the desired weight ofmeat cuts. Even with the change in vendor, the site occasionallycrashes under the strain of too much traffic.

Orders also can get bogged down because FreshDirect’sSAP system pulls information from the Web site in batches,not as each order is placed. In fact, some information it hascollected about customer preferences and the costs of deliveringgoods is hard to locate, because its disparate componentsdon’t exchange data as readily as Fedele would like.

But FreshDirect nonetheless has to thank Webvan for improvingits chances at success, beyond the low cost of its greencrates. Like Webvan, FreshDirect uses automated carouselsand conveyors to bring orders and totes to food-prep workersand packers. It’s almost routine technology today becausemany delivery companies adopted Webvan’s approach to conveyorsystems, says James Tenser, principal of VSN Strategies,a Tuscon, Ariz.-based consulting firm specializing in retail.

Merely surviving where others failed, however, is no longergood enough for FreshDirect. Fedele says the company’s secondand third years will be focused on tracking metrics suchas profit margins by product, bugs per production line, accuracyof orders and delivery cost per order, as it adds more than2,500 customers a week.

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

To keep things simple, FreshDirect is trying to perfect theoperations of its single distribution facility before expandingfurther. It is staking its reputation on the freshness of the perishablefoods it delivers into Manhattan, through the MidtownTunnel, which connects the western end of Long Islandto 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 upscalegrocer in Manhattan. FreshDirect cuts its own meatfrom whole carcasses, roasts its own coffee, develops its ownrelationships with seafood suppliers and inspects every pieceof produce that comes through its doors.