Analysis: FreshDirect Capitalizes on the Downturn

FreshDirect has launched several smart initiatives, but challenges remain both for this Web grocer and its competitors

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FreshDirect has succeeded where other online grocers, such as Webvan, failed because the company's executives had considerably more grocery experience when they founded the company, and they knew how to make a Web site appealing to consumers, says Russ Winer, chairman of the marketing department at New York University's Stern School of Business.

Another factor in the success of FreshDirect's operations: The cost of delivering to an apartment in New York City is the same whether FreshDirect is delivering one box or 10 boxes—and very often it is 10 boxes, which is, of course, much more profitable. The company has also done a great job amassing a database, says Winer, of customer orders that help FreshDirect develop a better understanding of what individual people want and the quantities they buy.

FreshDirect's 4-Minute Meal was a "terrific differentiator" that capitalizes on the fact more people are eating at home, according to Winer. He believes the prices are fair and the food is great, and he likes the idea of using celebrity chefs. Winer also thinks the feature on the Web site that reminds customers of things they bought recently is a great vehicle for stimulating additional purchases.

Different Delivery System

Winer is more skeptical about FreshDirect's plan to put vending machines in corporate locations. "I'm a little bit more suspicious of whether that will be successful," he says. "Vending machines require a different business model—they break down, and they can be damaged. I really question why they decided to get into that, and time will tell whether that is successful."

As FreshDirect continues to navigate the recession, it faces various challenges, Winer says. In a recession, people are concerned that a Web-based company will have higher prices than others. So FreshDirect has to work harder, he says, on maintaining the image that it is not more expensive, so it can win repeat purchases. "It's one thing to get people to buy once in a while—it's another to get them to buy more often."

FreshDirect also faces challenges shared by Web grocers broadly. "How do you change habits and the nature of the way people shop?" says Winer. "Given that only 3% of all purchases are made online, there is still a long way to go."

McConnon is a staff editor for BusinessWeek in New York.