(Bloomberg)—For many years, FreshDirect, No. 81 in the Internet Retailer 2018 Top 1000, has ruled the online grocery business in New York. In a city where most people don’t own cars, the company prospered by delivering a broad selection of fresh food to New Yorkers’ stoops and front lobbies. Families from Brooklyn to the Upper West Side came to rely on FreshDirect’s prepared meals, which were a snap to heat up and went down easy. Profitable, a rare feat in this corner of the web, the company kept expanding—adding new products to its website, rolling out same-day delivery of some items and opening a new fulfillment center that was supposed to cement its dominance.
In recent months, however, New Yorkers have found reason to go elsewhere. FreshDirect’s expansion has been bumpy, with more than a few deliveries going astray and once-loyal customers griping on social media. Meanwhile, four deep-pocketed rivals have set their sights on New York.
Walmart Inc.’s Jet.com, which has connected with urban millennials, just doubled down on groceries. Peapod, owned by Europe’s Ahold Delhaize NV, has almost three decades of experience in online groceries and says New York is a big part of an ambitious growth strategy.
Instacart is flush with nearly $1 billion in funding to grow its army of contractors who pick, pack and deliver bread and bananas for same-day delivery. And looming over them all is Amazon.com Inc. (No. 1), wielding reams of data from its millions of Prime subscribers and more than a dozen Whole Foods Market stores around the city.
They’re already chipping away at FreshDirect’s market share, which is still a respectable 63%, according to Earnest Research, but is 10 points lower than it was only a year ago.
With almost 9 million people packed into five boroughs of gridlocked traffic and subway chaos, no U.S. city is more suited to online grocery shopping than New York. Because in-store pickup of big food orders isn’t viable, speedy delivery of smaller bundles is the name of the game, and time-starved residents are willing to pay for that privilege. The close quarters of New York benefit online retailers because they need not deploy gas-guzzling refrigerated trucks and unionized drivers. (Parking tickets, though, are a cost of doing business.)
If you can’t make it there as a web grocer, you probably can’t make it anywhere.
“New York is the prime market for delivery,” says Tory Gundelach, vice president of retail insights at Kantar Consulting. “For those players that specialize in delivery, it’s critical to win there.”
Founded in 1999, FreshDirect recently moved its operations from Long Island City to a 400,000-square-foot facility in the South Bronx, a long-delayed project designed to double its roughly $800 million business. But delivery glitches and out-of-stock items tied to the transition have prompted longtime users like Joe Shortell, a human-resources consultant in the Bronx, to order less often.
“There have been some bumps in the road recently,” he says. (A FreshDirect spokesperson says service has returned to where it was before the transition.)
FreshDirect’s self-inflicted wounds come just as rivals ramp up. Peapod, whose parent runs the regional Stop & Shop supermarket chain, is the nation’s biggest internet grocer with 1,500 drivers and close to $1 billion in sales. But it’s never made much of a splash since hitting Manhattan in 2011.
To catch up, Peapod at first offered cheaper prices on everyday goods like coffee and milk. But FreshDirect locks many customers in with a Prime-like subscription service that provides unlimited deliveries. Two years ago FreshDirect launched Food Kick, which promises on-demand goodies like sushi and wine in as little as an hour.
“[Companies] are getting more creative about how to satisfy the demand,” says Scott DeGraeve, who founded an online grocery delivery business back in 1995 and later worked for Peapod. “You have that in other markets but it’s on steroids in New York City.”
Ahold Delhaize (No. 16 in the Internet Retailer 2018 Europe 500) CEO Frans Muller isn’t satisfied with Peapod’s U.S. growth rate, which is about half the pace of the broader e-commerce market. So he’s hired a new Peapod chief and created an entity called Peapod Digital Labs to drive innovations such as the ability to choose the desired ripeness of bananas and avocados before ordering them, based on when they’ll be eaten. Muller has pledged to triple Peapod’s growth rate to 30% within three years, and his online chief JJ Fleeman says New York is critical to that effort. “There’s more to learn there than anywhere, because that is where the demand is,” Fleeman says.
Analysts say it’s make-or-break time. “Peapod is at a turning point,” says Kantar’s Gundelach. “They got complacent and didn’t adapt to the changing environment.”
That environment now includes Jet, the e-commerce site acquired by Walmart in 2016. Jet had sold some groceries before, but it’s now got a wider assortment of food and just opened a 200,000-square-foot warehouse in the Bronx to offer scheduled same-day and next-day delivery across the city.
“We want to be a one-stop shop for the New York consumer,” says Carmela Cugini, a PepsiCo veteran who’s overseeing Jet’s grocery business.
Jet can benefit by piggybacking on Walmart—the nation’s biggest grocer and No. 3 in the Top 1000—to source some everyday items. To lure in foodies, it’s offering upscale fare like Pat LaFrieda meats, Big Gay Ice Cream and Orwashers baked goods. Jet is also borrowing from Walmart’s playbook with prices that are the lowest of the leading players for a typical basket of goods, according to an analysis by Brick Meets Click, a marketing and sales firm.
Jet’s challenge is that it’s not known for food. Many Jet customers are already getting their groceries elsewhere, and more than six of 10 Jet shoppers are Amazon Prime members, according to Kantar. It doesn’t help that the head of the company that’s delivering Jet’s grocery orders left last month. To establish its culinary bona fides, Jet has blanketed the city with purple-hued ads that feature unusual product juxtapositions—lipstick and salmon, say, or burgers and a sequined dress. The company also added meal kits from Blue Apron to the mix.
Then there’s Amazon. The king of e-commerce gobbles up half of all online retail sales but little of that comes from steak and eggs. Combined, Amazon and Whole Foods have less than 5% of U.S. grocery sales, according to Moody’s Corp. CEO Jeff Bezos wants more and is offering one-hour home delivery of Whole Foods products and an additional 10 percent off items like sockeye salmon for Prime customers. That’s helped Amazon boost its share of the city’s online grocery market over the past year, according to Earnest.
Amazon’s grocery service is still a work in progress, though: It goes by two different names, Amazon Fresh and PrimeNow, which confuses some consumers. The speedy delivery and discounts on Whole Foods’s typically pricey organic fare have convinced shoppers like Joe Shortell to give Amazon a try, but it’s not his go-to grocer yet.
Still, Amazon “has a war chest of capital and will be relentless in their pursuit of how to make it work,” says Mike Demko, a former FreshDirect executive who recently founded Locai, whose software helps brick-and-mortar grocers get online quickly. (He also has unique insight into Bezos, who was his college roommate.)
For New York’s legacy brick-and-mortar supermarkets, most of whom lack the capital and know-how for a full e-commerce service, Instacart offers a way to join the stampede online. The startup has boosted the roster of New York grocers it works with (a list that includes Whole Foods) and recently slashed its delivery fees to compete with rivals like Shipt, a delivery firm that fulfills orders from Target and other retailers.
Amid the arms race of delivery trucks, brands and personal shoppers, the winners in New York might well be the companies that acquire a nebulous quality FreshDirect once had in abundance: loyalty. “Food is the highest-trust category,” says Demko. “If you lose that, you lose the customer forever.”Favorite