FreshDirect: A Beloved Loser
An online grocer’s asset heavy and local focused business model come at odds with the rapid scalability often associated with the digital era.
FreshDirect was a god send. For my friends and me, New Yorkers who love to cook but didn’t have the time to get groceries, FreshDirect allowed us to shop with the click of a few buttons. (Side note, they have the BEST dark chocolate covered almonds. I dare you to try one and not reach for more). So imagine my heartache when I decided to put FreshDirect in the digital loser camp. As one of the first movers in online grocery, FreshDirect still only serves a handful of cities in the Northeast (e.g., sadly not in Boston). Many competitors, large and small, have sprung up and expanded aggressively into the online grocery space. There seems to be inherit tension between being a local food business and being an expansive online delivery service, and FreshDirect needs to tread this line very carefully.
Sixteen years since its founding and thirteen years since its first delivery, FreshDirect today only serves the New York and Philadelphia metropolitan area (with some cities in New Jersey, Connecticut, and Delaware). For reference, 13 years ago the first iPhone hadn’t been invented; 13 years ago most of us were just starting high school; 13 years ago Nickelback’s How You Remind Me was topping the charts. You get the point. FreshDirect’s business model is to source local food, store inventory in its warehouse in Long Island City, and deliver based on customers’ orders. The need for a physical warehouse and the mission to be local come at odds with the fast scalability often associated with online businesses.
In over a decade, plenty of competitors have sprouted up in the online grocery space. Many are household names: Amazon Pantry/Fresh, Blue Apron, Instacart, etc. Amazon Fresh, started in 2007 on the West Coast, has moved into FreshDirect’s backyard in New York and Philadelphia. Many small competitors adopt an intermediary model, skipping the need for warehouses, and allowing them to provide the delivery service more cheaply. Even though FreshDirect still enjoys significant brand equity in the North East, it will for sure feel the squeeze from competitors in all directions.
FreshDirect CEO, Jason Ackerman, has been quoted to not worry about the arrival of Amazon, seeing FreshDirect’s expertise in the food business as a key competitive advantage. Co-founder David McInerney is partaking in a public campaign to support local farmers and waging war on traditional retailers, which reportedly sacrifice taste for cost and convenience. However, the supposed focus on quality and community will likely result in a different (higher) cost structure than its competitors’. It is unclear how much consumers are willing to pay a premium and how sticky they will be to FreshDirect’s service given the available alternatives.
It is hard to ignore how slowly FreshDirect has grown geographical as other online grocery businesses have managed to scale up. Its asset heavy business model and focus on being local puts downward pressure on the scalability that often comes with digital businesses. That said, FreshDirect reportedly generates $400-500million in sales, has built up very robust customer database and analytics capabilities, and its recent double-downing on being local seem to come as a direct response to all the competitive pressure. Further, the grocery business is not a winner takes all industry, and it is likely FreshDirect can carve out a place for itself amongst the rising competition. For the love of those chocolate covered almonds, I hope they stay afloat.
Student comments on FreshDirect: A Beloved Loser
I agree FreshDirect is a loser. Amazon pantry and Amazon fresh are taking over the market. Since moving to Cambridge I’ve tried PeaPod and love its app and quick delivery.