Freshdirect Case Analysis

FreshDirect, LLC was founded in 1999 and launched in 2001 by cofounders Joseph Fedele and Jason Ackerman. Fedele brought knowledge of the New York City’s food industry, where the company was being established. Ackerman had exposure to the grocery industry, as he was an investment banker. Both these minds together in tandem allowed the formation of this company. FreshDirect operates as an online grocery store where they deliver goods right to one’s doorstep with one central headquarter to reduce structural cost. This still private company offers delivery to many New York City suburban areas saving consumers time (in the form of traveling to a brick and mortar grocery store), money (in the form of a decrease in parking tickets, and ordering food at the cheaper cost in some cases than the brick and mortar), and energy (less gas consumption).

With the barriers on entry relatively low in the online grocery industry, how much risk does FreshDirect face with new competition that can easily move into the market and snatch up what is already an overall low market share? Symptoms of the potential problem include a decline in sales and introduction of more online grocers YourGrocer, Peapod, and NetGrocer, some of which delivery across the entire United States vs FreshDirect’s limited area of the New York City metropolitan area. On top of these new companies, online retail giant, Amazon, has somewhat got in the picture as well, offering some nonperishable foods to their sales lineup.

Porter’s 5-Forces Model – One external analysis that can be completed is Porter’s 5-Forces model. This industry analysis helps determine the competitive environment. The following is what has been determined as the forces facing FreshDirect and considerations for the business:

Five Forces Model

Bargaining Power of Suppliers – Pressure = High

Bargaining Power of Buyers – Pressure = High

Threat of New Entrants – Pressure = Low

Rivalry Among Existing Firm – Pressure = Low

Threat of Substitute Products or Services – Pressure = Low

Large supplier purchasers have an “upper hand” in negotiations

Buyers tend to be loyal to a brand/company

Startup costs are high

Potential fast industry growth rate

Buyer inclination to produce

Volume amount is critical to suppliers

Limited buyer choice in packaged items

Advanced technologies are needed

Relatively few competitors (YourGrocer, Peapod, NetGrocer)

Limited number of substitutes

Critical production inputs are similar, reducing supplier power

Product and price are sensitive to consumers

Entry barriers are high in gaining consumer base

Exit barriers are low making easier for competition to fold

Freshness of products is difficult to recreate or substitute

Brand identity

Area of service is typically low and requires high commitment from customers

There is also use of the common SWOT analysis. This is a planning method used to evaluate a company’s strengths, weaknesses, opportunities, and threats when examining the formation or expansion of a business FreshDirect and its uniqueness is something that has to be considered, especially knowing that their overall market share will be relatively low to compared to brick and mortar establishments:

SWOT Analysis

Strengths

Online growth (consumers are becoming more using of online platform for ordering)

Pricing (can price lower with the lower cost of space)

Unique products (can customize items such as section of chicken wanted or cuts of meat)

Delivery to customers in select markets, saving driving cost, carrying distances, and time for customers

Reduced labor costs

Cut “middle man” out

Weaknesses

Low percentage of market share (2% of all grocery sales are online)

Lower volume and options of pre-packaged items

High startup costs

At the mercy of changing fuel costs and will have to decide how it wants to pass that to the customer

Customers cannot feel produce that give them the “test” of freshness before purchase

The “unknown” of how consumers will respond to online purchasing long-term

Area of business coverage is limited

High turnover at key executive positions

Opportunities

Online

Growing demand

Growing economy

Easily able to capture market where distance to brick and mortar are difficult to manage

Health food demand increases

Threats

Potential tax changes

Product substitution (organic vs fresh)

Additional competition entering the market (both online and brick and mortar)

Government regulations

Increased labor costs

Business costs can vary based on market conditions

Based on these two external tests, Fedele and Ackerman still were able to determine that their goal was attainable, and thus FreshDirect was created. What was mentioned but has a sense of being overlooked however is that online grocers are growing as well, even within the same market. YourGrocer, Peapod, and NetGrocer are three different online grocers that serve some of the same market that FreshDirect serve. So not only does FreshDirect service a relatively small market area compared to United States market as a whole, they have to deal with direct competition that do exactly what they do as well. They each carry their own pros and cons list that compare to FreshDirect as well. YourGrocer offers items cheaper with no delivery minimum, but specialize in bulk ordering, not as well built for the single bachelor living in an apartment. Peapod offers a larger market coverage area of service and utilizes its Partnership with Giant Foods and Stop & Shop to fulfill orders, but has a higher delivery minimum. NetGrocer offers service to the entire United States, but the foods they offer are mostly nonperishable and not next day delivery. Though FreshDirect has a limited market, it has expanded as profits started to show and soar four years into business.

Internally, one would look into FreshDirect financial ratios to find their strengths, weaknesses, and concerns. However, due to the company being private, the company can control financial data disbursement. When a company is listed on a public exchange their financials must be publically available. Though financials were not available for this internal analysis, there are a few key ratios that would be examined.

Because of the nature of perishable food products, inventory turnover ratio would be the number one ratio examined. With items such as milks, breads, and fresh produce that have a short shelf life, having this ratio was high as possible is critical to company success. Inventory turnover measures how many times the company turnovers over its inventory to a specific time.

Pricing, by nature, food costs are extremely low compared to large dollar purchases of vehicles or jewelry, and with this comes low margins. To battle these low margins, high volume is needed. Sales ratio in terms of sales per month, per day, or by space occupied may be used

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