Online Grocer Makes Money Helping Shoppers
The retail landscape in the U.S. has been littered with
companies that have failed trying to make a buck at the online grocery business.
But now, at least one, FreshDirect claims that it is making money — and quite
a bit of it, too.
FreshDirect CEO Rick Braddock told DailyFinance that the
New York-based company has been “profitable since 2008 and was substantially
profitable in 2009.”
Mr. Braddock said growth rates have picked up even more this year and credits
the company’s understanding of its shoppers for the increase.
“We run FreshDirect with the idea that profitability does matter and one way that we manage for profitability is by creating and using the best customer database in the business and we use it in real time,” he
told DailyFinance.
FreshDirect uses its database to remind shoppers of items that may need to
be repurchased and offers complementary product suggestions to build
add-on sales. Roughly 20 percent of FreshDirect shoppers are prompted on weekly
purchases with the average order increasing by an average of 10 percent in
the process.
The grocer also offers rating systems to help shoppers make the right buying
decisions. The company has a team of inspectors that use a five-star rating
system for produce and seafood. Factors such as freshness, ripeness and taste
determineCan the number of stars. More than half of FreshDirect’s customers
use the system.
Discussion Questions: Could FreshDirect work in other markets other than
densely-populated New York?
What impresses you most about the operation? Are there other online grocers
that you think are on a profitable track, as well?
As for everything, there is a time. The time is right for FreshDirect. There will be an emergence of farmer’s markets of roadside “fresh” stands and this will become the new norm. Families have so much going on and running at warp speed that going in and ordering your needs while the kids are in bed and having it delivered, on time and at a reasonable price–the time is right for this to take hold.
Remember how the milk man use to deliver milk (some of us can remember, others will have to look in the history books). This service was born out of convenience and necessity. FreshDirect is the old milk man on steroids with a few modern-day modifications. If done right, there is an opportunity for more to prosper with this model.
New York is a unique market and what works there wouldn’t necessarily work anywhere else. That said, the market for food delivered to the home should (logic and demographics tell us) be increasing over time.
The keys for success remain the same as they have always been in the online business–keep costs low and quality high and consistent. Clearly more effective use of data is critical but for lower density markets, there’s still that nagging “last mile” problem.
I’m still not sold on the online grocer idea. I have seen it fail so many times. I have to say that Fresh does address some issues that were missing in previous tries. Staying connected with the customer and building a bigger basket are 2 key components that can make this type of business sustainable.
Are they winning because it’s New York? We can’t say it’s all because of that but it probably is a big part of that. Open up in markets like Carlsbad, Poway, Boynton Beach and Pembroke Pines and that could be a truer test of the business model.
I understand that one of the things that kept FreshDirect from being profitable earlier was paying for all the parking tickets on their trucks. (Not joking here; it was a substantial sum.)
FreshDirect has done an incredible job with its shopper data, and unique, differentiated offerings. Anyone who thinks they understand this company, without spending an hour or two on its website, doesn’t get it. Can this work in other markets? Well, we’ve seen all the mistakes from companies that failed, as was noted. Let’s just say it wouldn’t be where I’d invest my retirement funds.
Home delivery is tough. I grew up on a farm and actually did deliver milk with my dad, door to door, before dawn and in the early hours. That still might work (having a route with prearranged orders), but we had a problem with spoilage of product left on doorsteps even back in the 50s and 60s. Not a major one, but it was there. With today’s two-income families, there’s never anybody home after say, 8 in the morning, so you’re in a bind unless you leave only non-perishables or have an expensive drop box.
FreshDirect is doing some good work with their database by prompting consumers, but I also love the product rating system. It would be better though if it were consumers who rated the products rather than staff at the company.
Here’s a ‘neat’ little add on to the idea of online grocery shopping: We exhibited at the recent NRF Show in January, and across the hall from us was a company demonstrating an in-home scanner that consumers would use to create shopping lists. You simple scanned an item that you just ran out of and it would upload it to an online shopping list. Imagine if that shopping list was linked to your online grocer and the goods just showed up at your door! That would entice me to use the service even more.
This model can work for FreshDirect in other areas–given shopper density and great product resources. Fact is, people are very busy, and you have to eat, right? It’s just that the execution has been a work in progress, and other companies have lost their way.
The key is understanding core shoppers and meeting their expectations. Staying connected and understanding changing needs is part of it. FreshDirect has worked to understand preferences, choices, and occasions, and the value proposition. Technology and new connectivity will bring possibilities with more convenience to explore.
The idea is good. A densely populated market improves the economics, especially if there is widespread use. However, the delivery piece needs to work seamlessly in a cost efficient manner. If that is ever worked out for a greater variety of types of markets, the rollout will be much quicker.
Thinking of all this in terms of the CONVERGENCE of online/offline retailing, for sure offline retailers should be seeking to emulate FreshDirect in their online businesses. But far more importantly, they should be seeking to emulate the customer management approach of FreshDirect in their offline businesses.
Convergence means that the online and offline business will become a seamless unit. This is what I mean by the Amazonification of Walmart. These two forms of business WILL converge. Right now, the online businesses are far more astute salesmen, compared to the passive “warehouse” model of the offline businesses. (Self-service means “sell yourself.” The retailer is a passive participant.)
It’s tough figuring out how to implement true sales techniques (as contrasted with merchandising techniques) without the technology available to the online side. But there are some great approaches. For example, “The Amazonian Ghost.“
Unless FreshDirect is going to disclose their financials, I don’t believe they are making money. They may define profit differently that what most of us define profit as.
Definitely you need population density, traffic congestion, larger households, higher incomes, and low auto ownership rates to make online shopping work. It’s good if customers don’t own cars. It’s good they have kids living with them in their high-rise apartments. And it’s good they make a lot of money to pay the high online prices and delivery charge.
Wherever you have that, then online shopping has a chance.