British Supermarket Buys into FreshDirect
Purchasing Safeway in the
U.K. allowed North of England-based Morrisons supermarket to establish a nationwide
presence. Since then, in less than a decade, advertising spend and, presumably,
delivery of advertising promises, have established the chain as one of the
top four in the country. Focusing on high quality, low priced fresh food, its
pre-tax profits increased 13 percent for the year ended Jan. 30.
Meanwhile,
the rest of the top four (Tesco, Sainsburys and Asda) have been building an
online presence alongside their bricks and mortar stores, leaving Morrisons
with an untapped revenue stream — until now.
At the beginning of March, Morrisons
spent £32 million ($51.3 million)
buying 10 percent of FreshDirect, an online grocer based in New York. In exchange
for its investment, Morrisons will have a seat on FreshDirect’s board
and will embed a team in the company to learn the ropes. The FreshDirect investment
comes on the heels of its acquisition of baby goods e-tailer kiddicare.com.
"I have seen retailers all over the world. Few have inspired me as much
as the team at FreshDirect, a highly successful and profitable food retailer
with a track record of terrific customer service," said Dalton Philips,
Morrisons’ chief executive, in a statement. "What we learn from
FreshDirect will be invaluable as we plan our own profitable e-commerce business
for the U.K."
Speaking to The Guardian, Mr. Philips said the partnership
will enable the retailer to avoid the mistakes of its larger competitors, claiming
their websites looked the "same" and their web businesses are losing
money.
"We don’t think anybody has cracked affordable fresh food online," he
told The Guardian. "I don’t believe anybody is profitable online
today."
For FreshDirect, the Morrisons investment is expected to fund its
expansion in the online grocery market, as well as to further capitalize the
business to support its resources for existing customers. FreshDirect will
also receive a minority economic interest in Morrisons’ planned London online
operation.
"We are excited for our new relationship with Morrisons," said
Jason Ackerman, FreshDirect founder and chief financial officer, in a statement. "It’s
wonderful to have a retail partner who shares our deep passion for great customer
service and quality fresh food. This investment is a strong endorsement of
our unique business model from a major player in the supermarket industry.
This new partnership and capital strengthens our ability to support our strong
growth and continued expansion."
During its twelve years in business,
FreshDirect has expanded from Manhattan to Queens, Brooklyn and, more recently,
New Jersey and Connecticut, The New
York Times’ Dealbook reports. It is an indisputably high-end business,
with an emphasis on quality. Like Morrisons, it is profitable and growing
at a healthy rate.
Discussion Questions
Discussion Questions: What do you think Morrisons can learn about online grocery from FreshDirect? What can FreshDirect learn from Morrisons? Do you see FreshDirect taking its online expertise to other retailers?
Obviously, Morrisons realizes how far behind the curve they are relative to online food shopping. The FreshDirect deal in concert with their recent purchase of UK baby goods seller Kiddicare, which makes 80% of its sales online, underscores their commitment to “buy” versus “build” an online food shopping strategy. The only shortcoming is that Morrisons does not plan to launch the online grocery shopping service until 2013, giving its three rivals more time to expand their in-place online shopping alternatives.
With the above qualifications, it appears that the Morrisons-FreshDirect partnership is a good one in that both firms are recognized for high quality, fresh products. While it appears that the primary advantage flows to Morrisons in terms of the FreshDirect online learning, FreshDirect can learn as well from the scale associated with Morrisons 440 stores.
FreshDirect’s current footprint and expansion model lends itself nicely to regional, non-competing food retailers, who have not fully invested in online food shopping. For such selective retailers, they could potentially employ a President’s Choice approach (exclusive branding) to their online expertise.
This is a tough nut to crack. It has been tried in many ways and I think the reasons it has not been widely accepted are behavioral and generational.
Food buying is simultaneously rational and emotional. There are deeply rooted rituals and habits that are hard to disrupt. As we see more use of mobile technology and if there are significant benefits from that, we may see more use of online grocery procurement.
What can these companies learn from each other? Hopefully they will compare behavioral notes and elevate the key values that each side has and leverage them in the other channel.