Courtesy of FreshDirect
By Beth Kowitt
December 15, 2014

Grocery delivery service FreshDirect thinks it has the ultimate weapon in the battle over your pantry—putting food first.

The New York City-based company got a new competitor in October when Amazon threw down the gauntlet by launching its grocery delivery operation in Brooklyn, its first move into the East Coast market.

FreshDirect CEO and co-founder Jason Ackerman says his company so far has not felt the impact of Amazon, in large part because the grocery delivery business is such an untapped segment.

Ackerman notes that food, about a $700 billion industry, is the largest retail category. But when it comes to online versus offline sales, online grocery is the least penetrated, making up about 1.5% of the overall grocery market. “The more competitors we have in the space, the more awareness there’s going to be,” he says. In fact, in the few days around Thanksgiving last month, FreshDirect experienced its busiest period ever.

According to a recent note by Citi, FreshDirect has the second-highest market share in the online grocery industry (7%), even though it only operates in the Tri-State area, Pennsylvania, and Delaware. Peapod, at No. 1 with 9% of the market, operates in both the Mid-Atlantic and Midwest. Ackerman says that FreshDirect is now one of the largest food retailers in New York.

The FreshDirect team thinks it gained—and can keep—its edge by focusing on its food roots. Before starting FreshDirect 15 years ago, Ackerman was an investment banker, financing and backing the supermarket sector as it went through a decade of consolidation.

He started FreshDirect around the same time as grocery delivery business Webvan, whose demise became synonymous with the bursting of the dot-com bubble. Ackerman says that in the early days, the model around the online grocery business was tied to building a distribution network—essentially creating a delivery business that started with food but could eventually deliver anything. Ackerman took a different approach. He built FreshDirect on the premise that it was a food company above all else. “Delivery is how we get it there, but we’re not oriented on the delivery business,” he says. “We start from different places.”

Being culinary focused has allowed FreshDirect to keep up with and capitalize on industry trends. The company, which sources a lot of its goods from local producers, offered CSA boxes for the first time this year. It also sells meal kits, positioning the service to square off against hot startups like Blue Apron and Plated that deliver all of the raw ingredients needed to make a particular dish. The FreshDirect team also noticed that many of its customers were having two Thanksgivings, one with family and another with friends (aka Friendsgiving), so it developed a line of items geared toward that second, smaller gathering.

Crucially, FreshDirect has figured out how to utilize technology for the benefit of its customers—something delivery operations born from brick-and-mortar grocery stores haven’t yet mastered. An analysis from Wells Fargo on the grocery delivery sector found that services like Safeway.com didn’t offer a great online experience, and wrote of Ahold-owned Peapod that “navigating and discovering [products] on the website requires the same kind of effort expended by a trip to the physical store—time, patience, and perseverance.”

In contrast, FreshDirect has prioritized its online user experience (it has a tablet app that should be out this week). It takes a Netflix-style approach: The more you use FreshDirect, the better sense the service has of your likes and dislikes, and the more it can tailor its individual recommendations. The company also partnered with Foodily’s Popcart, which allows users to add all of the items they find in an online recipe to their shopping cart and purchase them via FreshDirect.

A big point of differentiation between FreshDirect and the grocery store, according to Ackerman, is that his company cuts out a step of the supply chain. In the supermarket model, products go from a warehouse to the grocery store before hitting your fridge. With FreshDirect, food goes directly from the distribution center to your home.

Eliminating that extra point in the process has helped keep inventory levels lower and food fresher, Ackerman says. “We’re only managing one set of inventory, not at 20 locations,” he explains. “It’s a huge buy running through one place, which guarantees that the stuff moves faster and is not sitting around.” For example, if one of the fisherman they work with calls and he just caught a 300-pound tuna, FreshDirect can notify its customers via email and sell it out before it has even landed in their facility.

The company has just one distribution center, but Ackerman says management will consider adding another as the business expands.

When it comes to competing with Amazon, FreshDirect will need to keep its focus on food. FreshDirect is the David to Amazon’s Goliath. While Amazon knows delivery and logistics, it’s new to food. Wells Fargo’s analysis found that Amazon “has simply applied its ecommerce acumen to Fresh (i.e., an Amazon experience that happens to sell groceries), rather than a grocery store that is run by Amazon.” It had a similar critique of other services born from the web, reminding them that buying groceries is not the same as shopping for apparel or electronics and pushing them to “lose the cookie cutter category browse paradigm”

Meanwhile, FreshDirect came out of the Wells Fargo analysis on top, labeled “the best blend of a grocery and digital mindset.”

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