The Issue: FreshDirect Focuses on Customer Service

During the dot-com boom in the late 1990s, several online grocery companies like Priceline's (PCLN) grocery division and Foster City (Calif.)-based Webvan burst on the scene. They expanded aggressively into various cities. But when the bubble burst, capital dried up, and these companies went bankrupt.

During the current downturn, FreshDirect, the online grocer, based in Long Island City, N.Y., is defying the odds. CEO Richard Braddock (formerly the CEO of Priceline) says that while previous Web grocers used capital to expand, he is focusing on the customer experience. "We are going to make mistakes," he says, "but we will make you feel special, and our job is to offset the inevitable mistakes with some great solutions and great service."

The Information EdgeThe edge for FreshDirect, says Braddock, is its extensive database where it can gather more information about shopping patterns and behavior than a traditional bricks-and-mortar grocery store can. Finding ways to provide better customer service to the most loyal customers is particularly important during a downturn, he argues. "The core issue now is that consumers are paralyzed with the fear of the unknown, and that is holding back their spending," he says. So retailers like FreshDirect need to get creative about finding ways to increase sales.

Using its database, FreshDirect launched a new feature this spring that analyzes a customers previous shopping trips and prompts them at the checkout stage when they have forgotten something they typically buy, a technique online retailers like Amazon (AMZN) have used for some time. Braddock is pleased with the results so far. Almost 20% of FreshDirect customers are prompted by the reminder feature on a weekly basis, and they have increased their order size on average by 10%. Almost all customers have now used the feature at least once, says Braddock.

FreshDirect has also launched several products that appeal to the new frugality among consumers. Since more Americans are eating at home to save money, FreshDirect last fall rolled out 50 heat-and-eat meals (dubbed "4-Minute Meals"), that cost $7 to $15 apiece and are designed by chefs like Terrance Brennan and restaurants like Tabla and Rosa Mexicana. Braddock says these could not be duplicated by a competitor, because they use a unique microwaveable format—discovered in France—that keeps ingredients fresh. Traditional grocery stores would face the challenge of spoilage if they carried 50 ready-to-eat meal options like FreshDirect does, says Braddock.

Office VendingFreshDirect has also used the recession to expand its corporate business. Since many companies have cut their travel and expense budgets and decreased their meal allowances for employees, FreshDirect has started rolling out vending machines in office buildings in Manhattan. These machines sell the 4-Minute Meals and are being marketed to companies in industries like advertising and media where employees tend to work late.

FreshDirect continues to plan new rollouts for the rest of 2009 as part of its strategy to keep improving customer service. In 2008, CEO Braddock realized that one of the biggest obstacles to ordering groceries online is that consumers can't inspect and touch perishable food. So in December, FreshDirect introduced a rating system whereby a team of inspectors rated produce daily for color, taste, firmness, and ripeness. Starting in July, FreshDirect will offer the same five-star rating service for seafood.

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