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July 17, 2018 3:30 PM, EDT
Amazon Rival Draws Battle Lines With Bronx Warehouse
FreshDirect

FreshDirect has figured out an important trick: how to make money delivering groceries.

Founded in New York City during the original internet boom nearly 20 years ago, the company now is preparing to open a 400,000-square-foot facility in the South Bronx that will allow it to double its business, according to CEO Jason Ackerman.

Revenue is projected to exceed $800 million this year, according to an estimate from Kantar Retail.

Sales already have more than doubled over the last six years, and the company has been profitable since 2010. It sends trucks full of staples like paper towels, steak and peaches, to stock up city-dwellers’ apartments.

The expansion thrusts FreshDirect into the jockeying for position in the online grocery market as Amazon.com Inc.’s acquisition of Whole Foods forces both supermarket chains and startups into an e-commerce arms race. While the Seattle-based giant hasn’t had much luck cracking the code on fresh food over the last decade, its grocery push has forced rivals such as Walmart Inc. and Kroger Co. to spend billions to ramp up their own digital capabilities in anticipation of food spending shifting online.

Last Mile

FreshDirect, meanwhile, appears to have figured out the so-called last mile — the expensive final leg that makes grocery delivery such a difficult proposition. The closely held company is confident it can use its model in new markets, with Ackerman pointing to FreshDirect’s arrival in Philadelphia in 2012. The company has now been profitable there for three years and is expanding to Boston, he said.

But it won’t be easy with industry giants eyeing its turf.

New York in particular is a hotly contested market: Walmart’s Jet.com unit announced earlier this month it would offer same-day and next-day grocery deliveries as it opens a Bronx fulfillment center.

Ackerman acknowledged that FreshDirect, which charges about $6 to $7 for a typical delivery, will probably never be cheaper than Amazon or Walmart. The key, he said, is to target discerning customers who are willing to pay a bit more for the convenience and quality. There’s also know-how involved: The company can get delicate products like organic avocados and Nova Scotia swordfish to shoppers’ doorsteps in good shape — an issue that has plagued some retailers.

‘Very Hard’

“If you’re selling millions of things online, that’s not your focus,” Ackerman said, referring to the delivery of perishable goods. “We’ve been competing with a lot of players for a long time — it’s very hard to learn if you’re not from this business.”

FreshDirect itself is not immune to the difficulties of groceries. On July 15, the company tweeted that some customer orders were delayed by as much as two hours.

Only an estimated 2% of the roughly $800 billion U.S. grocery market is currently online, a tiny fraction compared to categories like apparel and electronics. U.S. consumers are loyal to their local stores, and many still want to pick their own meat and fresh produce. But the business is growing quickly, and e-commerce sales of food and beverages could hit $100 billion by 2025, according to Nielsen.

Founded in 1999, FreshDirect has been based in Long Island City, just across the East River from Manhattan. The company has three buildings and seven parking lots there, but ran out of space about three years ago. The new 15-acre Bronx facility doubles FreshDirect’s space and will allow it to expand offerings such as meal kits, prepared foods like lasagna, and marinated meat and seafood.

In 2016, FreshDirect raised $189 million in a funding round led JPMorgan Chase & Co., the most ever for the company. The cash has helped pay for the new facility as well as the start of Food Kick, a two-hour delivery service for customers in Manhattan and Brooklyn that’s akin to Amazon’s Prime Now.

Biggest Player

FreshDirect is by far the biggest online grocer in the New York area, controlling about 54% of the market, according to data from Earnest Research, which analyzes credit card transactions. Peapod, an operation owned by Ahold Delhaize, the Dutch grocer company that owns Food Lion and Stop & Shop, is next with about 21%.

But Amazon Fresh and Instacart Inc. have been growing rapidly, hitting 8.8% of the market in May, eating away at FreshDirect’s advantage. This, coupled with Jet.com’s push, could present a challenge for the company as it tries to continue expanding beyond New York, said Jennifer Bartashus, an analyst at Bloomberg Intelligence.

Q&A

“The timing of the expansion is tough — there’s a lot of people going after that delivery space,” she said.

Still, FreshDirect is effectively competing with rivals many times its size: Amazon reported 2017 revenue of $177.9 billion, while Walmart’s sales for the year through Jan. 31 were more than $500 billion.

FreshDirect could draw takeover interest. The company would be particularly attractive because it’s profitable, something Ackerman and fellow co-founder David McInerney attribute to a “methodical and maniacal” focus on supply chain, coupled with software that pushes deliveries to time slots where it can make money.

“Could there be opportunities? Sure, but that’s not our focus,” Ackerman said in reference to takeover offers. “We didn’t build this to sell it.”

FreshDirect could also benefit from competitors’ push to promote grocery delivery, they said, since that could convince more shoppers to investigate their online options.