FreshDirect: Ready To Deliver

By Larry Dignan  |  Posted 2004-02-17

FreshDirect: Ready To Deliver

ItS 5:30 a.m. at FreshDirects warehouse and headquarters in Long Island City, N.Y. Its 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 grocers 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 Webvans 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, FreshDirects points of differentiation are cooks, butchers and the like who personally prepare fresh meat, deli and seafood orders for customers. There is automation at FreshDirects 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 companys strategy is to buy applications off the shelf where it can, customize where it has to and scrimp on areas that dont have a direct impact on its business.

For starters, FreshDirect chose SAPs widely used R/3 software for coordinating its warehouse and distribution efforts. Even then, FreshDirect didnt 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 hasnt 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 didnt 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 FreshDirects 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 dont 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. Its almost routine technology today because many delivery companies adopted Webvans 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 companys 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 FreshDirects SAP system, but reports arent 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.

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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 citys richest borough.

That means personal, not just automated, attention to detail. "This industry requires tremendous micromanagement," says Fedele."Food is a discriminating purchase."

FreshDirects 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.

Next Page: Keeping on track.

Keeping On Track

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. Dont 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. Trachtenbergs 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, 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- Directs 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 companys 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.

Trachtenbergs 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, FreshDirects 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.

"Its 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 FreshDirects single-distribution-center strategy can work in other cities remains to be seen. FreshDirects focus on meat and produce in particular suits its home market well, says Tenser, because "its hard to find decent-looking produce at a grocery store in New York." FreshDirect trucks also dont 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 isnt 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? Were stepping on the moon here and you never know whats in that next crater."

Next Page: FreshDirect Base Case.

FreshDirect Base Case

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 its 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.

  • 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.

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