Case study on online grocery delivery strategy and business model

Background:

FreshDirect, founded in 2001, is an online grocery delivery service based in New York City. The company pioneered a unique business model, focusing on fresh, high-quality products delivered directly to customers' doors. FreshDirect's success stems from its efficient supply chain, eliminating middlemen and sourcing directly from farms and fisheries. The company has expanded its services to several states in the northeastern United States and has differentiated itself through its emphasis on freshness, quality, and customer service.

Problem Statement:

Despite its initial success and loyal customer base in New York City, FreshDirect faces significant challenges as it considers further expansion and aims to maintain its market position:

1. Increasing competition from well-funded rivals like AmazonFresh, Walmart's Jet.com, and Peapod, who are aggressively entering the online grocery market.

2. Scalability issues when expanding beyond dense urban areas, as FreshDirect's current model is optimized for city environments.

3. Environmental concerns regarding packaging waste and delivery emissions, which may impact the company's reputation and operations.

4. Customer trust issues related to product freshness and quality in an online shopping environment.

5. Technological challenges in keeping up with innovations in e-commerce and logistics.

6. Balancing rapid growth with maintaining quality and customer satisfaction.

As FreshDirect contemplates global expansion, it must address these challenges while preserving its core value proposition and adapting to diverse international markets. The company needs to develop strategies that will allow it to compete effectively on a larger scale while maintaining its reputation for quality and freshness.

Looking at the key factors of FreshDirect environment

I see both favourable and hindering dimensions impacting its performance:

Internally FreshDirect build up its operation slowly focussing on New York with a stable product centre and delivery services from 2001 to 2012. Furthermore, the company operated an efficient production centre with expert staff, high quality assurance and service requirements with automated control systems. It invested heavily into superb cleanliness, health and safety standards to be able to offer and deliver high quality and wide-range of fresh produce. It was very close to customer needs by teaming up with renowned chefs and having products from local (close distance) farms. Short distances in sourcing as well as delivery kept the operations costs overall low with a lean value chain. This also led to relatively fast delivery times and offers which were further boosted by a range of deliver options for customers similar to ecommerce.

This regional located and high-quality focus strategy together with being one of the first pure online grocery player in the US contributed significantly to FreshDirect growths in the first decade which was on the other hand hampered by internal management succession, strategy and implementation issues.

Externally, FreshDirect bought their products directly from producer to cut out the costs of wholesalers. Furthermore, it achieved huge government subsidies to build a new facility in the Bronx to expand its services. The competition was slowly catching up with a major threat mainly in form nation-wide brick & mortar competitors offering extra online grocery services based on their existing locations, supplier / delivery networks and consumer base.

Based on Porter’s 5 Forces, FreshDirect is mainly facing threats from potential entrants with mixed brick & mortar and online groceries from the top 10 grocery chains in the US and their finance / political power and economy of scale as well as substitutes from other online providers which are growing rapidly and over a wider range of products. Buyers are kept mainly confident, however the issue of online supermarkets not able to proof the freshness of their products by “look & feel” is a further threat.

On the supplier side, FreshDirect was smart to cut out wholesalers and therefore has a relatively good bargaining power with its direct produce suppliers as they depend on the relationship with FreshDirect.

In the future, with all these rivalries serving offline and online grocery customers, it can be a similar economy of scale and bargain race as in ecommerce, in which FreshDirect giving its limited size and capital power is likely to lose in the long-run against bigger competitors as we have seen in ecommerce business. With limited locations and product range, it is also unlikely that FreshDirect could survive as a niche player if it does not change its strategy or will be bought like Peapod.

Based on PESTEL, I see following indicators, partly mentioned above:

Political: Within New York, FreshDirect has a very good political standing with access to subsidies and an image to boost local production and bolster a sustainable economy while serving its customers efficiently and fast. Its differentiation to Pennsylvania or more rural areas or 2nd tier cities was less successful.
Economic: Within New York, FreshDirect created a lot of jobs and built up a local based grocery player and supported local companies in food production, shipping services and quality control / warehousing.
Social: FreshDirect gave customers access to fresh and healthy products even if they are in busy jobs and cannot shop themselves. It also boosted home-cooking. However, its trucks are bothering neighbourhoods based on traffic congestions due to double-parking. Furthermore, due to its bargaining and price power, FreshDirect often undercuts local farmer markets and ecological friendly small grocery shops locally and in New Yorks neighbourhoods.
Technological: As a German, I am not sure if SAP was really a great choice for an ERP or company management system honestly in terms of adaption, speed and future enhancements. Furthermore, most ecommerce system rely on smaller and more agile solutions rather than cooperate ones. These smaller systems run separately for consumer apps, warehousing and delivery based on my experience working for Alibaba (Lazada) in Asia, rather than combining them into one less adaptable system.
Environmental: FreshDirect environmental impact is mixed, as it has positive side to deal directly with food producer and enable fresh products to their consumers (e.g. farm to table), however the delivery and supply chain system by truck is environmentally damaging especially for small orders. Besides, the excessive use of single packaging of each product leads to excessive waste and customer complaints.
Legal: FreshDirect succeeded in local subsidy law suits but had legal issues and high cost due to high turnover of management, poor strategy outside New York and potential litigation based on customer complaints or order mismanagement.

SWOT Analysis of FreshDirect for online grocery strategies

Strengths:

- Decisive early mover with almost blue ocean strategy in New York within and beyond online grocery with ready cooked meals, recipe and outstanding delivery options. At least blue sea strategy remained with these innovations.

- Excellent operation and business model to directly source, operate and deliver at low cost based on a focus strategy in New York and close areas.

- Low costs due to fully focus on online customer and no brick & mortar shop investment.

- Low costs due to direct sourcing from selected food producers while cutting out wholesalers.

- State of the art production, quality assurance and deliver system with automated control.

- Good delivery windows and promises with multiple delivery options to choose

- Good skilled initial founders and employees.

Weakness:

- High management turnover and therefore business and strategy changes and loss of cofounders as industry experts.

- Failed to seek outside investment to scale up by going public as a company and to hit necessary economy of scale margins to survive in a long run.

- Failed to outsource warehousing and delivery to further lower costs and to be able to scale which can backfire in a low pricing / cost leadership strategy.

- Low product assortment and therefore not be able to be a one-stop grocery shop for time-starved and responsible shoppers.

- Truck delivery and plastic packaging for organic food to hamper the eco-friendly customer experience. Single packaging for each item in the same delivery leads to more waste on customer side.

Opportunities:

- Clear mission and brand promise to cater both B2C and B2B based on high quality and freshness standards.

- Partner up with online or offline retailers to expand.

- Discover new modes of faster and more eco-friendly deliveries.

- Low-cost marketing approach leaves room for more investment in online marketing.

- Focus on fast turning and higher priced fresh food rather than bulk staples.

- Great product information, influencers and further cross-selling opportunities (e.g. through recipes).

Threats:

- Technical issue due to software updates with email errors impacting customers.

- Bad service perception and customer perception.

- Price and quality-sensitivity of online consumers.

- Consumers can choose more nation-wide recognised grocery brands with wider assortment for a one stop shopping experience.

- Top brick & mortar and online competitors can expand rapidly and heavily invest and outspend FreshDirect.

- Traffic congestion in the cities due to deliveries and therefore bad ecological and social image and potential future delivery restrictions.

- Price wars with new and existing online competitors due to their size and scalability.

- Need of direct funding for expansion and technology update due to lack of business partners or share based investment (IPO)

Based on its core strengths and to tackle its weaknesses

FreshDirect should expand and partner up with one of the top 10 or 20 food retailers in the US in order to secure the future of the business and to expand in a more professional way to other first-tier business cities in the US (e.g. San Francisco, Houston, Chicago, etc.) and therefore switch from a pioneering to a more adaptive strategy after 20 years of operations.

Based on its competitive advantages and strong brand image especially in New York it could leverage these opportunities by staying in the online business and not expand into brick & mortar but looking for a more powerful brick & mortar partner. This recommendable to leverage synergies from both industries such as being a one-stop retail or food experience, shift the offline to online customer base and enable shared warehousing, delivery and store infrastructure.

Partnering up and keeping its competitive advantages can further cement its initial strength in cost leadership while maintaining high-quality fresh produce and great customer and delivery services in-house and therefore allows an integrated low cost and wider differentiation strategy which is difficult to substitute.

A partnership would also be on track with its previous strategy to not go public for investments and would also support FreshDirect with the offline reputation of this partner, if chosen carefully and can maintain or even boost its quality standards by adding more resources and more products.

Furthermore, a retail partnership can lead to pooled negotiating power with suppliers and a vertical integration of supply chains and systems while maintaining the core quality and freshness competencies.

Another advantage of a partnership could be a higher pool of more stable and seasoned senior managers to bring stability into the organisation and get the organisation away from the initial founder-based start-up culture into a more mature enterprise. Leadership stability and the tapping into this brain power could also lead to better strategies and initiatives in the future to stabilize its markets and to expand more skilfully and successful than before.

Besides the possibility having a partnership with a top 10 or 20 food retailers, I could also propose a more specialised partnership or acquisition of smaller warehousing or delivery providers which are already established in other top-tier cities. Therefore, it would easier to expand to other regions and cities while focussing on its core business of offering low-cost fresh produce (similar to Walmart’s acquisition of “Parcel”).

That means regarding the primary activities in its value chain, FreshDirect should mainly focus on its inbound logistics, core operation and customer service as core strengths and should partner or outsource further activities like outbound logistic, technology, etc.

FreshDirect also needs to invest more in front and back-end technologies and logistics in order to keep up with technological trends and to improve operations and delivery in terms of reliability and speed. Technology also helps in a long run to reduce costs by managing inventories, logistic and customer experience properly. So besides outsourcing some of these activities, FreshDirect could also partner with tech startups or acquire them in an early stage with specialised solutions to increase its efficiency, budgets and customer satisfaction.

Furthermore, given the customer complaints and the loss of loyal customers we propose a better CRM and customer complaint system to resolve them before social posting appears and to maintain its overall positive brand image especially in its Northern East Coast home base around New York.

It is paramount that FreshDirect wins back the trust of its customers

before any scaling or business activity planned by following activities:

First, I would propose that FreshDirect should focus on customer experience, issues and complaints as a most urgent and direct threat to its business. In 2019 it is losing not only common customers based on technical, product and service issues but also its previously “superfans” and probably promotors. According to the NPS (Net Promoter Score) feedback methodology used mainly by start-ups on online businesses, NPS is not only essential by monitoring customer feedback (in which Customer Satisfaction Rating (CSAT) is more efficient) but also proving to potential investors that the company has a healthy and stable customer based with potential to be further recommended and promoted.

This could be achieved by starting a full-fledged customer experience project inside the organisation to measure the end-to-end customer experience and propose fast actions to improve system, payment, delivery or product issues. Furthermore, with listening to customer demands, needs and wishes FreshDirect’s could improve successively its limited assortment and locations reach.

FreshDirect should take all complaints and media feedback serious and react fast to win the trust of their customer base and fans back and prove to them on a regular basis that their feedback is heard and improvements based on this feedback are implemented fast. This customer experience improvement approach normally identifies very efficiently the 10 most critical issues or wishes of customers across the entire value chain in any given time. FreshDirect needs agile / cross-functional project teams to come up with fast solutions to solve these issues before more customers are affected especially on core topics like system, stock and delivery reliability. These topics are one of the main differentiators and competitive advantages of online businesses to brick and mortar. Based on this customer experience initiatives FreshDirect can rebuild its brand promise and reputation as a convenience, cost and quality leader with more credibility and proven customer success stories. With the feedback of the customer, it could also re-work, adapt and integrate its current food-quality rating system which seems to be complicated for some customer or could backfire due to its exaggerated transparency and room for manipulation.

A second action could be that Fresh Direct enhances its eco-friendly practices and show the customer that they really care about ESG topics. Sustainability is a main customer driver in the 2020s and if done right, it can further reduce costs of packaging, storage and transportation. Similar than their competitors FreshDirect should also test other more eco-friendly delivery methods rather than just trucks and also change their fleet to smaller EV units like cars, scooters or bikes. Regarding the waste complaints from customer that each produce is singly packed in one delivery, FreshDirect should work with a specialist provider or partner to tackle this issue and to provide more combined and bundled packaging solutions.

A third action could be that FreshDirect starts and tests a nation-wide online marketplace strategy rather than a direct provider. FreshDirect could let local farmers from all of the country offer their produce on their platform and to connect them with adequate delivery services to provide the products. This would also a be very low-cost and low operations approach to scaling and could solve FreshDirect competitive and strategic economy of scale challenges against bigger online and brick & mortar competitors. This marketplace approach could be further focussed and piloted first on either B2B or B2C customers to make it easier to handle and faster to implement. E.g. on the West Coast of the U.S., we are aware that more and more tech companies provide fresh or ready cooked food to their remote-working employees, besides free food at their headquarter or campus canteens. This B2B marketplace approach could be tested in areas with high technology or software employment like San Francisco or Seattle. A marketplace approach keeps the value chain very slim as the production and warehousing stay on farmers side, while the delivery is completely outsourced.

Next Steps

After initial success, FreshDirect could invest in parts of this value chain to take over especially the operations and warehousing as core competency and establish its full operational foothold in these markets.