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Crazy Business Ideas That Actually Worked: FreshDirect

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Launched in the middle of Webvan's implosion, the question was, could FreshDirect get the online grocery business right?

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The story of online grocer FreshDirect is something of the chicken or egg riddle. Did FreshDirect come along once New Yorkers supposedly became too busy to shop for groceries, or did New Yorkers give up grocery shopping once FreshDirect came along?

Regardless of the answer, one thing is certain: The idea that people could -- and would want to -- order groceries on their computer and have them delivered has actually worked.

FreshDirect was founded in 1999 and three years later its orange and green refrigerated trucks hit the Manhattan streets. Those trucks have become almost as ubiquitous as yellow taxicabs. The same can be said for those FreshDirect cardboard boxes on city sidewalks on garbage and recycling pick-up days. According to reports, 15% of 1.6 million Manhattanites have used FreshDirect.

The company delivers to more than 250,000 customers in New York and New Jersey. Forbes reports that the online grocer had earned $250 million in revenue last year and this year has grown its customer base by 20-25%.

Now FreshDirect is expanding outside New York City. It's offering services in parts of New Jersey, in New York's Westchester County, in the Hamptons, and Connecticut. It actually sees greater fortunes waiting in the suburbs and beyond, where residents are becoming too busy to shop at chains owned by Kroger (KR), Safeway (SWY), and SuperValu (SVU). Rick Braddock, FreshDirect's CEO, estimates that the nationwide online grocery market is about $20 billion.

Furthermore, FreshDirect is redoubling its efforts on the local front, offering goods from 30 farms found within 300 miles of New York City, many of which will go from the garden to table in less than 48 hours. It continues to add new ideas: Customers can order via a FreshDirect app from their iPhone (AAPL). The app highlights previous purchases, special deals, and a list of "favorites."

These developments speak to the rapid growth of a young and no doubt pioneering company, one whose ascent was by no means assured. Jason Ackerman and Joseph Fedele founded the company in 1999 in the wake of others' failed attempts at an online grocer. Webvan was the most prominent bust; founded by Louis Borders (of book-store fame), it offered delivery service in 10 major city markets but foundered quickly with its rapid growth unsupported by shaky infrastructure and untenable guarantees, like a 30-minute delivery window. (FreshDirect offers two-hour windows.)

Ackerman, who worked in finance and whose uncle was junk-bond king Michael Milken's right-hand man, sought out Fedele, who worked at Fairway grocery. Their initial idea was to open up fresh, good retail stores in New York. But they then turned to the Internet.

In a Bloomberg TV interview last year, Ackerman said, "[W]e really founded on two guiding principles. First was to rethink how we get product from the farm to a customer's table in a much more efficient way which lends itself to deliver better quality products at better prices.

"And second, because we know so much about our customers, is to use that information to deliver a much more personalized, better experience."

The idea was eliminate the middleman. By taking orders in advance, FreshDirect devised a made-to-order model. It prepares the foods, and as a result, according to Ackerman, this is a more cost-effective and less wasteful process than the regular grocery-store model.

Ackerman and Fedele split up the responsibilities based on their expertise. In that Bloomberg interview, Ackerman said, "Joe, having worked at -- and built -- Fairway was responsible for bringing in all of the supply. And I focused on how to actually take all the supply and get it within the warehouse and actually get it to the customer, which is no small feat."

They located a warehouse directly across the river from Manhattan in Long Island City. Their space has grown and they still fill all their orders from that location. Finding the proper software was another story: It took several years to get the software right -- it was designed with SAP AG (SAP) -- and Ackerman says they're still tweaking it a decade later.

Before those trucks ever hit the streets, FreshDirect spent over $75 million just to sell its first customer, according to Ackerman.

Today, the whole process is so streamlined that FreshDirect has a hold on its customers once they sign up. When you visit the site, FreshDirect spits back your past orders and favorite items. It does things like suggest bottles of wine and sauce to go along with your order of a specific cut of steak.

As CEO Rick Braddock told Forbes, "[W]e know everything you've done with us to the extent you've been a customer. We know every single SKU you bought on every single shop. When you come back to the site for your next visit, we're able to access that information and use it real-time to improve your experience."

In other words, Big Brother has entered the grocery aisle. Grocery shopping is now one more idea that, for better or worse, technology has turned from fanciful to ordinary.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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