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


What FreshDirect Learned from Dell

FreshDirect offers a wider selection of cereal — a total of 73 choices, according to our search late last year — comparable to a typical Manhattan store. But to keep the SKU count down, only five of the 73 come in more than one size. The high-volume brands — Cheerios, Kellogg’s Corn Flakes, Kellogg’s Raisin Bran, Special K, and Total — each come in two sizes. Compare that to the 125-plus brands in a typical suburban grocery store, 20 or more of which usually come in two or three sizes. Adding in private-label store brands, a typical store carries more than 200 different cereal SKUs.

FreshDirect does offer a large selection of what it calls specialty items — condiments, cookies, crackers, herbs and spices, oils and vinegars, etc. — from which it can capture higher margins. A “specialty” tab on the home page seeks to attract its most discerning customers to those products, instead of similar, but less expensive, items sold under the more mundane “grocery” tab.

For example, FreshDirect carries 26 different SKUs of mustard. For those consumers seeking a value brand, French’s Classic Yellow in the squeeze bottle is sold at a price below that at a traditional grocery store. But the company also offers 25 other mustards, including some exotic imports at prices as much as 10 times higher than the value brand’s. In the juice section, lesser-known products, such as Ceres fruit juice, which is imported from South Africa, are priced at a premium above the more common brands, such as Dole’s pineapple juice. Eventually, FreshDirect management hopes that one-third of its packaged-goods revenue will come from such specialty items.

Will customers accept FreshDirect’s less extensive range of packaged goods to enjoy the fresh product advantages that it offers? Mr. Ackerman believes so.

“A typical wholesale grocery store like Costco offers a mere 4,000 SKUs of the most basic products like soda, diapers, and toilet paper in bulk quantities at unbeatable prices,” he says. “The dramatic growth of the warehouse format offers ample evidence that customers will accept a limited product offering of basic commodities to get lower prices. In fact, our ideal customer would be someone who buys bulk staples once a month from Costco, and buys everything else from us once a week.”

No Promised Land
FreshDirect’s management holds no illusions about a promised land in the “last mile,” but sees the last mile as a necessary evil that supports the make-to-order model — again, a point of view to which Michael Dell could readily relate. FreshDirect has learned from its predecessors’ mistakes. Webvan, Kozmo, and Urbanfetch offered free delivery; FreshDirect charges $3.95 for delivery and also requires a $40 minimum order. This delivery charge is competitive with the $2.50 to $5 charge of a typical Manhattan grocery store. Such pricing generally covers the delivery cost and meets consumer expectations, according to the startup’s market research. And, as was the case with Webvan and Urbanfetch, FreshDirect’s drivers don’t accept tips.

To control the cost of the “necessary evil” of home delivery, FreshDirect doesn’t offer same-day delivery — only next-day delivery. In addition, it delivers only between 4 p.m. and midnight and promises delivery within a two-hour window. In contrast, to emphasize the convenience of delivery, Webvan offered slots from 6 a.m. to 10 p.m. and initially promised delivery within a 30-minute window. Such precision demanded sophisticated routing software, but still yielded regular redeliveries. Although it is still early in its rollout of services, FreshDirect claims redeliveries of less than one-quarter of 1 percent.

The location of its processing facility proves the most critical factor in FreshDirect’s cost-efficient delivery model. Long Island City, in the New York City borough of Queens, is less than a quarter-mile from the Midtown tunnel connecting Long Island and Manhattan. This gives FreshDirect easy access to the greatest population density (a crucial variable in delivery economics) in the United States: Roughly 4 million people can be found within a 10-mile radius of its processing center. Thanks to this population density, FreshDirect averages nine to 10 deliveries per hour with a two-person crew — more than triple the three deliveries per hour that Webvan struggled to achieve with its single-driver model.

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