http://www.businessweek.com/articles/2013-03-14/freshdirect-vs-dot-peapod-new-yorks-online-food-fight

Retailing

FreshDirect vs. Peapod: New York's Online Food Fight


FreshDirect vs. Peapod: New York's Online Food Fight

Statue of Liberty: Rohan Van Twest/Getty Images; Groceries: Jose Luis Pelaez/Getty Images

Like many New Yorkers, Trish Shortell is a longtime customer of FreshDirect, the city’s No. 1 online grocer. But Shortell, a recruiter for a New York advertising agency and mother of three, has begun to find FreshDirect’s selection lacking and its prices a bit rich, even by New York standards. Cooked wild king crab legs go for $24.99 a pound, and Swiss Gruyère cheese, aged 14 months in Alpine caves, is $19.99 a pound. So lately Shortell has been shifting some purchases to Peapod, a rival online grocer owned by Dutch retailer Ahold. That’s good news for the interloper, which charges $2.79 for a half gallon of Farmland Special Request Skim Plus fat-free milk, $1.50 cheaper than FreshDirect. Boasts Peg Merzbacher, Peapod’s director of marketing: “We have suburban supermarket prices in the city.”

That poses a challenge for FreshDirect, whose orange-and-green delivery trucks have ruled Manhattan’s double-parked streets for a decade. Now its drivers jockey for curb space with vans from Peapod. Although it’s a relatively new kid on the block in New York, Peapod is the biggest Internet grocer in the U.S., thanks in part to partnerships with Ahold’s big brick-and-mortar Stop & Shop and Giant supermarket chains along the East Coast. It waited until 2011, though, to enter Manhattan, where FreshDirect estimates it has 80 percent of the market. To catch up, Peapod’s offering free delivery to new customers and cheaper prices on everyday goods like coffee and milk.

That approach lured enough shoppers to give Peapod a sales gain of more than 10 percent in 2012, with a similar increase forecast this year, says Merzbacher. The growth will help Ahold reach its goal of tripling global online sales to €1.5 billion ($2 billion) by 2016. U.S. consumers will buy $21 billion of groceries on the Web in 2016, a 52 percent jump over last year, forecasts Forrester Research (FORR).

Closely held FreshDirect expects shoppers will remain loyal to the fresh foods and prepared meals that helped push its sales to about $400 million last year, according to the company. “There’s room for two competitors,” says Tom Meyvis, a marketing professor at New York University’s Stern School of Business. “What Peapod can do is to focus less on the gourmet segment and emphasize regular products at a competitive price.”

Peapod, founded by brothers Andrew and Thomas Parkinson in suburban Chicago in 1989, was acquired by Ahold in 2000, just as the dot-com bubble burst. Today it sells on the East Coast and in several Midwestern markets. Peapod avoided Manhattan for years, partly because the snarling traffic and strict parking regulations can make the delivery business a nightmare. FreshDirect doesn’t take issue with a newspaper report that its drivers amassed $600,000 in parking tickets during the company’s first two years.

Despite the challenges, Manhattan is an alluring market for online grocers thanks to its densely packed, Web-savvy, time-starved residents. FreshDirect’s sales hit $100 million after two years, fueled by its recommendations engine and an ordering system that promised delivery inside a two-hour window. Today it serves 100,000 active customers. Having secured a commanding presence in New York City and its surrounding suburbs, FreshDirect expanded to Philadelphia in October.

Peapod’s plan to win over Manhattan hinges on lower prices. It sells a 12-ounce bag of Dunkin’ Donuts (DNKN) original blend ground coffee for $6.99, 30 percent cheaper than FreshDirect. Evian water, Skippy peanut butter, and Kellogg’s Frosted Flakes are also less expensive.

FreshDirect co-founder David McInerney says the company’s large assortment of fresh produce, meats, fish, and cheeses gives it a big edge over Peapod. He says competition from natural food purveyor Whole Foods Market (WFM), with seven locations in Manhattan, is a bigger concern. The company has also developed about 100 microwaveable meals, some co-branded with popular Manhattan restaurants such as Rosa Mexicano. Priced around $9, the meals appeal to busy New Yorkers who want good food fast. “There’s no competitive advantage in packaged food,” McInerney says. “There are plenty of people that can ship a box of cereal.”

The bottom line: American consumers’ purchases of groceries online are expected to jump 52 percent in the next four years.

Cruz is a reporter for Bloomberg News in Frankfurt.

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