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


What FreshDirect Learned from Dell

Equally passionate and experienced food professionals, their impressive resumes colorfully featured on its Web site, run FreshDirect’s operations. Take David Weber, who, with 30 years in the business as butcher, grader, buyer, and distributor, has delivered top-quality meat to Brooklyn’s Peter Luger Steakhouse, Connecticut-based Stew Leonard’s, and New York’s Fairway Markets. Or Tony Como, head of vegetables, who has 32 years of experience and the ability “to spot the best of the crop from 20 feet away.”

A Different Model
Rather than reproduce a traditional supermarket online, the FreshDirect management team has set out to create a totally new model. About 50 percent of sales in a typical grocery store comes from such packaged goods as cereal, soda, and laundry detergent; the other 50 percent comes from fresh products — meat, seafood, produce, deli products, and baked goods.

The typical grocery store carries about 25,000 different packaged goods items and roughly 2,200 perishable products. In contrast, FreshDirect offers 5,000 perishable products but only 3,000 choices in packaged goods. As a result, it generates a revenue pattern dramatically different from that of a traditional grocer: an expected 75 percent in perishables and only 25 percent packaged goods. Given the higher margins for perishable goods, this change in the mix of goods alone probably generates an 8 percentage point improvement in gross margins — even without considering the efficiency gains that FreshDirect hopes to achieve.

To make this model work, FreshDirect built a 300,000-square-foot facility in Long Island City, which it calls a processing center rather than a distribution center. This distinction, like the name FreshDirect, underscores the company’s emphasis on good-quality fresh foods rather than the delivery process. FreshDirect offers the New Economy equivalent of the local fresh market, but it can bring the fresh product to your door because central processing lets it create scale efficiencies unachievable by the local market.

Ambient temperatures prevail in a mere 50,000 square feet of the facility, the section dedicated to storing and picking the case goods. The rest of the facility ranges from a low of minus 25 degrees for frozen food to a high of 62 degrees in one of its specially designed fruit and vegetable rooms for ripening tomatoes. (There are separate compartments offering optimum temperatures for everything from avocados to zucchini.)

Although the processing center was built with dedicated areas maintained at a wide range of temperatures, much of the space is kept at a temperature just above freezing to ensure quality control for processing food according to USDA standards. The facility contains meat-, poultry-, and seafood-processing lines capable of trimming and slicing some 100,000 pounds of product to precise customer specifications each day. Unlike the small-scale operations in a grocery store, which focus on keeping the display cases filled with standard-size packs, FreshDirect’s high-volume operations cut and trim every item to each customer’s order.

A Shorter Supply Chain
Thanks to its make-to-order approach and scaled, vertical integration, FreshDirect shortens the supply chain to produce a fresher product at a lower cost.

Consider the seafood operation. FreshDirect’s representatives place initial orders at the docks in lower Manhattan as the catch arrives during the day and into the evening. At midnight, FreshDirect stops taking consumer orders for the following day and provides an exact order quantity to the seafood buyers. The prescribed quantities arrive at the Long Island City processing facility around 3 a.m., to be cut according to customer orders by early to mid-morning. Customer deliveries begin at 4 p.m. the same day, resulting in a “dock to door” time that is often less than 24 hours. On average, FreshDirect’s seafood department has about one day’s worth of inventory, compared with the seafood counter at a well-run grocery store, which has seven to nine days’ worth of inventory. Michael Dell might even be proud.

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