FreshDirect: Ready To Deliver

FreshDirect: Ready To Deliver

Larry Dignan

IT’S 5:30 A.M. at FreshDirect’s warehouse and headquarters in Long Island City, N.Y. It’s 40 degrees outside and 38 degrees inside.

Butchers are slicing, dicing and packaging fresh meats in

what is essentially a 300,000-square-foot refrigerator, getting

orders ready for the online grocer’s 73,000 active customers

in New York City. Other workers are packing boxes of dry

goods and preparing greens.

“Greens” as in apples, peppers, lettuce-and green, insulated

plastic crates adorned with the logo of a company called Webvan.

Webvan? Yes, Webvan-the dot-com delivery service that

ran up a deficit of $830 million in little more than five years

before flaming out.

FreshDirect founder (and, until recently, chief executive

officer) Joe Fedele bought the crates for eight cents on the

dollar in 2001, along with ovens, fryers, kettles and even “one

or two” trucks from Webvan as it was beginning to liquidate.

His goal: “To acquire assets as cheaply as possible and make

something out of them,” he says.

Fedele hopes buying on the cheap will help FreshDirect

avoid Webvan’s fate. In fact, Fedele says FreshDirect turned

profitable last month, just 16 months after its September

2002 launch.

Where Webvan planned to roll out rapidly into 26 markets,

FreshDirect has concentrated solely on New York City. Where

Webvan planned to raise billions to bankroll its ambition, Fresh-

Direct is content with about $100 million in venture capital.

And where Webvan invested heavily in state-of-the-art automated

warehouses to handle 500,000 different products

with little human intervention, FreshDirect’s points of differentiation

are cooks, butchers and the like who personally

prepare fresh meat, deli and seafood orders for customers.

There is automation at FreshDirect’s single distribution center,

but only in the background.

Indeed, where Webvan relied heavily on developing its own

software and systems to deliver “competitive advantage,” Fresh-

Direct has not. The company’s strategy is to buy applications

off the shelf where it can, customize where it has to and scrimp

on areas that don’t have a direct impact on its business.

For starters, FreshDirect chose SAP’s widely used R/3 software for coordinating its warehouse and distribution efforts. Even then, FreshDirect didn’t buy all parts of the R/3 system-

just those components that allowed it to track inventory, compile

financial reports and tag beef, lettuce and other products

to fulfill customers’ orders.

Not that FreshDirect hasn’t stumbled technologically.

Initially, FreshDirect hired Blue Martini Software in 2001 to

build an “intelligent” Web site that would enable customers to

create shopping lists and place orders. But Fedele says that

after a “few million” dollars and a year of development were

spent on the effort, the company gave up and wound up suing

Blue Martini, believing its software didn’t live up to its promise.

Executives of Blue Martini declined to comment.

In 2003, FreshDirect switched to BEA Systems’ Weblogic

platform, in its effort to keep track of customer preferences

as precise as the ripeness of tomatoes or the desired weight of

meat cuts. Even with the change in vendor, the site occasionally

crashes under the strain of too much traffic.

Orders also can get bogged down because FreshDirect’s

SAP system pulls information from the Web site in batches,

not as each order is placed. In fact, some information it has

collected about customer preferences and the costs of delivering

goods is hard to locate, because its disparate components

don’t exchange data as readily as Fedele would like.

But FreshDirect nonetheless has to thank Webvan for improving

its chances at success, beyond the low cost of its green

crates. Like Webvan, FreshDirect uses automated carousels

and conveyors to bring orders and totes to food-prep workers

and packers. It’s almost routine technology today because

many delivery companies adopted Webvan’s approach to conveyor

systems, says James Tenser, principal of VSN Strategies,

a Tuscon, Ariz.-based consulting firm specializing in retail.

Merely surviving where others failed, however, is no longer

good enough for FreshDirect. Fedele says the company’s second

and third years will be focused on tracking metrics such

as profit margins by product, bugs per production line, accuracy

of orders and delivery cost per order, as it adds more than

2,500 customers a week.

These statistics can be culled from FreshDirect’s SAP system,

but reports aren’t available until two hours after data is

collected. The goal, instead, is to display current results around

the clock, to analyze and address wasted effort and save time.

To keep things simple, FreshDirect is trying to perfect the

operations of its single distribution facility before expanding

further. It is staking its reputation on the freshness of the perishable

foods it delivers into Manhattan, through the Midtown

Tunnel, which connects the western end of Long Island

to the city’s richest borough.

That means personal, not just automated, attention to detail.

“This industry requires tremendous micromanagement,”

says Fedele.”Food is a discriminating purchase.”

FreshDirect’s advantage is its ability to cut out middlemen,

says Fedele, who also co-founded the Fairway Market, an upscale

grocer in Manhattan. FreshDirect cuts its own meat

from whole carcasses, roasts its own coffee, develops its own

relationships with seafood suppliers and inspects every piece

of produce that comes through its doors.

Keeping On Track

One micromanagement moment: A 40-ish man wearing a

white coat and hairnet walks by Wayne Roopnarine, vice president

of operations, with an eggplant and stops for a brief chat.

“See these?” the man says, pointing to a trio of spots on the

eggplant.

“Interesting degradation. Don’t forget the photo shoot,”

says Roopnarine.

“We experiment with produce in different temperatures

and humidity levels and take photos for our records,” explains

Roopnarine. “Tomatoes have to be warm. Finding the right

temperature for bananas is our biggest challenge. We want a

vibrant color when they go on the truck.”

If FreshDirect can take what it learns about temperatures,

humidity and other factors and embed that in mathematical

rules, then its information systems could improve bottomline

results for the company. Toward that end, Fedele recently

hired Dean Furbush as chief operating officer, and Myles

Trachtenberg as chief technology officer, to give the company

number-crunching power. Trachtenberg’s predecessor, Robert

Slater, left for personal reasons. Furbush was executive vice

president for transaction services of the Nasdaq Stock Exchange.

Trachtenberg was chief information officer at Prudential

Healthcare and a technology executive at Chase

Manhattan, now J.P. Morgan Chase.

In order to boost the size of each order and drive FreshDirect

into profitability, Furbush and Trachtenberg intend to

mimic Dell, Amazon.com and FedEx Corp. in their ability not

just to cut out middlemen, but to listen closely to what customers

want.

The company did not quite break even on its $90 million

in sales for the year ended Sept. 30. But its average order size

did reach $97, up from $79 at the time of its launch a year earlier.

The company is adding wine and other pricey goods to

help boost the typical order past $100.

But it can also reach profitability by cutting costs. Fresh-

Direct’s systems will be tweaked to help it identify the cost of

each step of fulfilling its 3,500 daily orders, from initial preparation

to shrink wrapping to packing to shipping. FreshDirect

will analyze, for example, the positions of workers throughout

the warehouse and calculate the most efficient place for each

one along its conveyor belt.

Currently, hunches and gut instincts rule. At 6 a.m., the

company’s vice president of operations, chief operating officer

and chief technology officer often roam the plant floor, watching

how workers prepare orders. Then, they watch as orders move through the plant, reaching a crescendo at 4 p.m., the last moment that FreshDirect can afford to get crates into a truck

for delivery and still reach customers coming home from work.

The executives monitor “choke points” that slow down

work, such as the speed of conveyor belts. One morning in

November, for instance, one belt was moving meat too quickly

for packers to keep up. The fix was to slow down the belt for

more consistent flow. That fix, however, took days of observation.

The change could not be tested until the following

Wednesday, the one day each week new logistical procedures

are tried out. That can mean a week of savings lost.

Eventually, FreshDirect may feed information from its Ermanco

conveyor and sorting systems as well as its Diamond

Phoenix carousels into its SAP planning software. Bar codes on

crates and packages will allow FreshDirect to pinpoint any

order anywhere in its plant at any time-or even the individual

components of an order. Tracking the pieces will let it figure

out how to process orders better. Faster processing means

less inventory on hand, lowering costs.

Trachtenberg’s objective is to keep no more than 72 hours

worth of inventory at any time. If successful, FreshDirect may

be able to predict how many turkeys to load up on before

Thanksgiving and how many bunches of bananas to stock in

December versus July.

“We want to track margin by department and give managers

overall [profit-and-loss] responsibility for their goods in

real-time,” says Trachtenberg, who hopes in 2004 to have managers

making decisions based on such metrics.

Trachtenberg also hopes to start cross-selling, using the

Web site. For instance, FreshDirect could suggest a red wine

to go with each order of filet mignon. Right now, FreshDirect’s

site mainly helps customers with new orders by giving them

access to their previous ones.

Tenser of VSN Strategies says FreshDirect for now is angling

for that $20 a week that the typical grocery shopper

does not spend in a store. However, FreshDirect could become

time-starved customers’ primary grocer if it continues

to add products.

“It’s a game of stealing share from local grocers,” says Tenser.

So far, he says, “FreshDirect appears to be skimming the

cream very well.”

But whether FreshDirect’s single-distribution-center strategy

can work in other cities remains to be seen. FreshDirect’s

focus on meat and produce in particular suits its home market

well, says Tenser, because “it’s hard to find decent-looking

produce at a grocery store in New York.” FreshDirect trucks

also don’t have to travel far, unlike what the case would be in

such sprawling cities as Dallas or Los Angeles.

Fedele does say Boston, Atlanta and Washington, D.C.,

would be natural locales for FreshDirect, along with “anywhere

people want better food at better prices.” But he says Fresh-

Direct isn’t in any rush to expand beyond New York.

Right now, the Long Island City plant is only operating at

12% capacity. Fedele says the warehouse should be operating

at 70% of capacity before FreshDirect would consider expansion

seriously.

“Before we expand with cookie-cutter facilities we have to get

this one right,” says Fedele. “What will we run into at 30% and

50%? And 70%? Will we have to reengineer? We’re stepping on

the moon here and you never know what’s in that next crater.”

FreshDirect Base Case

Headquarters: 23-30 Borden Ave., Long Island City, NY 11101

Phone: (718) 928-1000

Chief Technology Officer: Myles Trachtenberg

Financials: Privately held with $90 million in revenue for first full

fiscal year ended Sept. 30, 2003. Company says it’s now profitable.

Challenge: Expand use of existing facility from 12% of capacity to

30% or more while maintaining quality. Expand delivery into new

areas in New York City.

BASELINE GOALS:

Deliver seven days a week, up from the existing six-day schedule.

Boost average order size by roughly 10%, to $110.

Begin tracking speed and quality metrics, such as time to

process order from raw material to delivery.

Allow managers to access metrics.

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Baseline.