Growth Matters: FreshDirect Nudges Its Way To Profits


The online grocery stories industry has been, to put it bluntly, a disaster. Just over a decade ago, an early online grocery service known as Webvan raised $375 million in its November 1999 initial public offering, achieving a peak stock market value of $1.2 billion. The company bragged about its 26-city expansion plan, signing a $1 billion Bechtel contract to build high-tech warehouses worth $30 million each. Then, it filed for bankruptcy in July 2001 after losing money every year.

But now, a relatively new online grocery service seems to have figured out how to do it right. The company, is FreshDirect and it has avoided Webvan's fate by trying not to get too big too fast.

Profitability Matters

FreshDirect started off in New York City about six years ago and is growing and profitable. So far this year, the company's CEO Rick Braddock, says that in the first few weeks of 2010 his company has been growing at an accelerating rate compared to 2009, when it generated more than $250 million in revenue. According to Braddock, the privately held company has been "been profitable since 2008 and was substantially profitable in 2009."

The service, which lets people order groceries online, makes money, in part, by using information to run its business better. Braddock explains, "We run FreshDirect with the idea that profitability does matter and one way that we manage for profitability is by creating and using the best customer database in the business and we use it in real time."

Don't Forget The String Beans

FreshDirect uses information in different ways to increase its market share. Braddock says that the company uses its customer database to cross-sell products. So if, in the past, a customer ordered a filet mignon online, as well as roast potatoes and string beans, FreshDirect can give the customer a little nudge the next time he comes online and just orders the steak. "We can suggest to our customers that they also order the other items that they purchased the previous times that they had ordered that steak," says Braddock. Such as the string beans and the potatoes. The little nudge, according to Braddock, goes a long way to getting customers to order more.

So far, the strategy is working. Almost 20% of FreshDirect customers are prompted by the reminder feature on a weekly basis, and they have increased their order size on average by 10%. Almost all customers have now used the feature at least once, according to Braddock.

Since an online grocery service can obviously not allow you to feel if an avocado is just right, or if a tomato is too soft, FreshDirect has developed others ways to help its customers buy groceries. The services offers features such as a star rating feature so that customers will know, for example, how fresh the produce is that they're ordering. The rating system is developed by a team of inspectors who rate produce daily for color, taste, firmness and ripeness. FreshDirect also offers the same five-star rating service for seafood and some 50% to 70% of its customers use that feature.

New Yorkers, who can be especially finicky, are strong supporters of FreshDirect and it's very likely that the company's success will soon expand to other cities -- a terrific story for tough economic times.

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