March 7 (Bloomberg) -- FreshDirect’s orange-and-green delivery trucks have ruled Manhattan’s double-parked streets for a decade, catering to New Yorkers too harried to schlep to the grocery store. Lately, its drivers have found themselves jockeying for space at the curb with vans from rival Peapod.
Peapod, owned by Dutch retailer Royal Ahold NV, is the biggest Internet grocer in the U.S., yet it waited until 2011 to enter Manhattan, where FreshDirect estimates it has 80 percent of the market. To catch up, Peapod is offering free delivery and cheaper prices on everyday goods like coffee and milk.
That approach lured enough shoppers to deliver sales gains above 10 percent in 2012, with a similar increase forecast this year. The growth will help Ahold reach its goal of tripling online sales to 1.5 billion euros ($2 billion) by 2016. Closely held FreshDirect, displaying a haughtiness New Yorkers are famous for, isn’t worried. It expects shoppers will remain loyal to the pricey fresh foods and ready meals that helped push sales to about $400 million last year.
“There’s room for two competitors,” said 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.”
Ahold could use an online boost, as its shares trade at a 39 percent discount to the Stoxx Europe 600 Index. Over the past year, Ahold’s shares have risen 9.5 percent, versus a 13 percent gain for the index. The e-commerce push comes as U.S. retailers such as Wal-Mart Stores Inc. test online grocery sales. U.S. consumers will buy $21 billion worth of groceries via the Web in 2016, a 52 percent increase over last year, according to Forrester Research.
Peapod was founded by brothers Andrew and Thomas Parkinson in the Chicago suburb of Evanston in 1989. Ahold acquired the company in 2000, just as the dot-com bubble burst, and today it sells on the East Coast and in several Midwestern markets. For years Peapod avoided Manhattan, due in part to the snarling traffic and strict parking regulations. FreshDirect’s drivers accumulate tens of thousands of dollars a year in parking tickets.
Despite the challenges, Manhattan is an alluring market for online grocers, thanks to its densely-packed, Web-savvy and time-starved population. FreshDirect’s sales hit $100 million after just two years, fueled by an Amazon.com-esque recommendations engine and a custom-built ordering system that promised delivery inside a two-hour window.
Today, the company serves 100,000 active customers from a distribution center in Long Island City, just across the East River from Manhattan, and it’s moving to a bigger facility in the South Bronx soon. Having taken New York City and surrounding suburbs, FreshDirect invaded Philadelphia in October.
Peapod’s plan to win over Manhattan residents hinges on lower prices. A 12-ounce bag of Dunkin’ Donuts original blend ground coffee sells for $6.99, 30 percent cheaper than from FreshDirect. A half-gallon of Farmland Skim Plus fat-free milk is $3.29 on Peapod’s website, a buck cheaper than FreshDirect. Evian water, Skippy peanut butter, and Frosted Flakes: all also less expensive.
“We have suburban supermarket prices in the city,” said Peg Merzbacher, Peapod’s director of marketing.
New Peapod customers get free delivery during March. After that, they’ll pay $9.95 for orders under $100 and $6.95 for bigger orders. FreshDirect charges $5.99 to deliver in Manhattan, and frequent customers can pay $60 for six months of unlimited deliveries.
Peapod’s “ambassadors,” its term for drivers, learn the ins and outs of parking in each neighborhood to avoid tickets. Frozen items are packed in dry ice, eliminating the need for refrigerated trucks. Peapod says it offers a broader selection by piggybacking off the distribution network that services Ahold’s Stop & Shop and Giant chains.
That variety appeals to Trish Shortell, a recruiter for a New York advertising agency and a mother of three. A longtime FreshDirect customer, Shortell said she sometimes finds its selection lacking and its prices high, so she shifts to Peapod.
“The resources that Peapod is putting into New York City clearly shows that Peapod is committed for the long term,” said Wade Hanson, an analyst at researcher Technomic Inc.
Its investments include a new distribution center five miles from Manhattan in New Jersey, which opens next year. Today Peapod delivers to Manhattan from a warehouse in Mount Vernon, just north of the city. Peapod’s delivery range has expanded from the Upper East Side and Upper West Side to all of Manhattan.
FreshDirect co-founder David McInerney said his assortment of fresh produce, meats, fish and cheeses gives him an edge. Competition from natural-food purveyor Whole Foods Market Inc., with seven locations in Manhattan, is a bigger concern, he said.
“We went into this market saying we were going to focus on fresh food,” McInerney said. “There’s no competitive advantage in packaged food. There are plenty of people that can ship a box of cereal.”
FreshDirect offers cooked wild king crab legs for $24.99 a pound and Swiss Gruyere cheese, aged 14 months in Alpine caves, for $19.99 a pound. Neither is available at Peapod. McInerney says he spends about 75 percent of his time traveling with his fresh food buyers, meeting salmon fishermen in Alaska, say, or visiting ranches. Farmers regularly speak to employees at the company’s Monday morning meetings.
The company has also developed about 100 microwaveable meals, some co-branded with popular Manhattan restaurants like Rosa Mexicano. Priced around $9, they appeal to busy New Yorkers who want good food fast.
While FreshDirect focuses on squeezing more out of its customers, Peapod can use its low prices to entice the 6 out of 10 New Yorkers who, according to Zagat Survey LLC, don’t buy groceries online.
That’s a wise move, as FreshDirect customers like Anne Gregory, a teacher and mother of two, aren’t easily wooed.
“People have told me I should try Peapod,” she said, “but my thinking is, ‘If it ain’t broke, don’t fix it.’ ”
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