FreshDirect: Reinventing Online Food Shopping

The history of online grocery operations is a checkered one, littered with the remains of such star-crossed endeavors as Webvan, Streamline, HomeRuns, ShopLink and Priceline's WebHouse, among others.

Yet the notion of selling groceries online to consumers refuses to die. Indeed, in the last few years it has staged something of a revival. Emblematic of that revival is the success of a New York City-based, Internet-only operator named FreshDirect. In January, FreshDirect announced it had fulfilled its two-millionth order after little more than two years in business. The customer who placed that order, Barbara Meltsner of Manhattan, got a year's worth of free groceries, up to $1,200.

FreshDirect, which operates out of a 300,000-square-foot warehouse in Long Island City, N.Y., not far from its main hub of Manhattan, claims more than 200,000 customers for its mostly perishable product offering. According to Myles Trachtenberg, chief technology officer, FreshDirect delivers more than one million items per week, sells out on a daily basis, and has served 30% of the homes in Manhattan at least once. Its president, Steve Michaelson, said it's experiencing double-digit growth in some neighborhoods year over year.

The key to its success? It keeps its costs low and its food fresh, thanks to its super-efficient fulfillment process. As Trachtenberg put it, FreshDirect attempts to emulate the just-in-time manufacturing capability of Dell, the delivery logistics of FedEx, and the e-commerce sophistication of Amazon. "There is nothing else that rivals it in the world," he said.

Much of this can be attributed to its use of technology, including a highly responsive Web site, advanced servers, and robust production and warehouse management systems. "FreshDirect spent quite a bit of time planning how to build technology. They've tinkered with it and improved it," said Dr. Ken Boyer, associate professor of supply chain management, Michigan State University, and one of the authors of the book "Extending the Supply Chain."

For succeeding against the odds in the challenging arena of online sales by using a unique fulfillment model backed by sophisticated technology, FreshDirect has been selected as the winner of SN's Technology Excellence Award in the online sales category.

One of FreshDirect's most recent projects involved upgrading the performance of its Web site, which FreshDirect refers to as its storefront. Because of extreme usage during peak shopping hours, the site's response times, after a customer's click, were sometimes as long as eight seconds, according to Trachtenberg.

FreshDirect was able to increase the speed of data delivered to its customers' browsers through data compression technology, which it installed last summer. "Its performance was not at a level that our customers would be satisfied with," he said. "We've more than tripled our storefront's system capacity. Now, depending on a customer's Internet connection, the site's response can take less than one second."

At the same time, the retailer added flexibility to its infrastructure through the use of "blade servers," which contain blades consisting of their own memory and hard disk. "They allow us to easily add additional infrastructure and expand our capacity," said Trachtenberg. "With the blade servers, if we need to upgrade, it's just a matter of unplugging the blades and replacing them. This is light years ahead of what we were previously working with."

Residing on its infrastructure is FreshDirect's production system, from SAP, Newtown Square, Pa. It's used each day to divide orders by delivery location and food type, for maximum efficiency. After being organized, order information is handed down in waves to computers housed within the facility's temperature-controlled preparation stations, each dedicated to a different product area like meat, seafood or deli.

"We are light years beyond the traditional grocer when it comes to food production," he said. "We can process over 1,000 fresh-food orders per hour."

Prepared items are labeled with a bar code and scanned so they can be registered in FreshDirect's warehouse management system. Scanned items are put on a conveyor belt. "Each of the belts is connected to another belt, which can divert items to the left or right," said Trachtenberg. "The system 'knows' to divert an item to a particular zone, based on its SKU."

Once an item reaches its destination zone, it's scanned again. Then FreshDirect's put-to-light system illuminates the box that it should be placed in. "The worker places the item in the box, and hits the light button to confirm it's been packed," said Trachtenberg. "Items can then be tracked to their box."

FreshDirect's assortment consists largely (75%) of higher-margin fresh foods, which it claims cost 25% less than those that can be purchased in a traditional supermarket. Helping matters are relatively inexpensive delivery fees, ranging from $3.95 to $4.95 — less than most cab rides used for grocery shopping trips in the Manhattan, Brooklyn and Queens, N.Y., markets it serves.

"FreshDirect delivers less expensive groceries right to my apartment, and the drivers don't accept tips," said FreshDirect shopper Lauren Ranieri. "The food is very fresh, and they're always throwing free items in with our order like fresh bread or apple cider."

Future FreshDirect technology projects may include a more sophisticated delivery tracking system than the Nextel-based dispatch system on which FreshDirect currently relies. The retailer may also invest in additional sortation equipment, according to Trachtenberg.

Although it doesn't make sense for the online grocer now, RFID technology may someday be incorporated into its processes. "We've been investigating it on a unit basis, but it still seems to be a bit cost-prohibitive," said Trachtenberg. "So it's probably still a couple of years off."