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 / Spring 2003 / Issue 30(originally published by Booz & Company)


What FreshDirect Learned from Dell

And what other e-tailers might learn from make-to-order pioneers.

Illustration by Lars Leetaru
Despite the carnage among the same-day home-delivery e-tailers on that stretch of the information superhighway we dubbed “the last mile to nowhere” in strategy+business, a new online grocer recently began delivery operations in New York City. (See “The Last Mile to Nowhere: Flaws & Fallacies in Internet Home-Delivery Schemes,” by Tim Laseter et al., s+b, Third Quarter 2000.)

Like its deceased predecessors Webvan Group Inc., Inc., and Inc., is a pure-play startup pursuing a dream of rapid home delivery of food products. Unlike its predecessors, FreshDirect has a well-thought-out operating strategy — and it’s a model that might just work.

FreshDirect doesn’t look to other retailers, and certainly not to other e-tailers, for inspiration. As FreshDirect’s cofounder Jason Ackerman recently told Fortune magazine, “The only reason we chose the Internet was that it helped us reach people at a lower transaction cost. It allows us to do for food what Michael Dell did for computers.” Like the Dell Computer Corporation, FreshDirect employs a make-to-order philosophy to eliminate the middleman and create a more efficient supply chain. The Internet offers a critical tool to achieve the operating efficiencies FreshDirect needs to profitably serve its targeted customers.

FreshDirect’s operating strategy also turns the traditional grocery business model — which offers wide variety to a diverse consumer population linked largely by geographic proximity — on its head. FreshDirect craftily offers a selection of basic but still high-quality staples, and employs variety and sells specialty items only when they will clearly pay off. The question is whether the consumer appetite will match the volume and offerings of food scaled to deliver.

Fresh Comes First
The inspiration behind FreshDirect dates to Columbus Day 1998, during the heyday of dot-com mania, when erstwhile e-tailer Webvan was also making the venture-capital rounds preparatory to its June 1999 launch. Unlike Webvan, however, the founders of FreshDirect never sought to become one of the few companies to “earn the right to cross into a person’s home,” the goal espoused by Webvan’s former chief executive, George Shaheen. In fact, Louis Border, the creator and founder of Webvan, never wanted to be in the grocery business, but saw it as a pathway to achieve dominance in the “last mile” to the consumer’s home. Groceries, as an ongoing “replenishment” purchase, would provide the base load for delivering a plethora of products bought online. In early business plans, Mr. Border described a vision of carrying a million stock-keeping units (SKUs).

FreshDirect’s focus, by contrast, is not the service, but the product. “It’s not about convenience. Online shopping and home delivery can be inconvenient,” Mr. Ackerman told us. “We focus on fresh products and offer higher quality at a lower cost by eliminating waste throughout the grocery supply chain in each individual processing step.”

The FreshDirect management team has deep roots in the fresh and prepared food business. Mr. Ackerman, 35, brings a broad strategic view of the industry from his experience as an investment banker specializing in supermarket mergers and acquisitions at Donaldson, Lufkin & Jenrette. The company’s other founder, Joseph Fedele, brings hands-on experience in the local market to the operation. Before teaming with Mr. Ackerman to launch FreshDirect, the 50-year-old Mr. Fedele was a cofounder of and partner in Fairway Uptown, an ambitious and successful venture to build a massive fresh-food emporium in Harlem. With his intense personality, seething with energy, Mr. Ackerman triggered the partnership that led to FreshDirect when he approached Mr. Fedele to propose launching a chain of fresh-food stores. Ultimately, the pair drew inspiration from the Dell model.

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