With revenues approaching $300 million a year, the company seems to be one of the few examples of a start-up, online grocery easiness actually being profitable. Most previous start-up, online groceries have failed, while existing traditional grocery stores have been more successful in online delivery from their local physical stores. For instance, a leading example of dot. Com excess was the flame out of online grocery start-up Waveband in 1999. Continued Chapter 1 Mbabane burned through $1. 2 billion from investors in order to launch its online grocery business in ten markets.
Waveband went bankrupt in 2001. Freeholders was founded in 1999?Just prior to the burst in the Internet bubble. The business plan for inline groceries was to focus on a high-density, single metropolitan area like Manhattan in New York City, to offer farm-fresh food, and deliver it on-time at prices about 15% less than local stores. A high-density urban area meant fewer delivery trucks would be needed, and average incomes were quite high in Manhattan. Most investors and commentators thought the task difficult, if not impossible.
For many [ears it was a combination of both. Freeholders built a 300,000-square-foot headquarters and refrigerated packing plant in 2000 in the Long Island City section of Queens and made its first deliveries in 2002. He Freeholders Web site features around 3,000 perishables and 3,000 packaged goods compared to the typical 25,000 packaged goods and 2,200 perishable items that a typical grocery store offers. To provide the level of service it wanted, Freeholders created the most modern automated perishable food processing plant in the United States.
While most of the plant is kept at 36 degrees to ensure freshness and quality control, dedicated areas vary from a low of minus 25 degrees for frozen foods to a high of 62 degrees in one of its specially designed fruit and vegetable rooms. Freeholders butchers meat from whole carcasses, makes its own sausage, cuts Jp its own fish, grinds coffee, bakes bread and pastries, and cooks entire prepared meals. Cleanliness is an obsession? the factory was built to exceed U. S. Department of Agriculture standards.
Despite attention to production detail at the plant, from 2002 until 2008 Freeholders burned through investor cash as it tried to execute on its business plan. According to current CEO Richard Bradford, nothing went according to the plan. “We broke too many eggs. We showed up with thawed ice cream. We bruised the produce. We delivered late. Our trucks were stuck in traffic. We missed items in orders. We didn’t remedial service issues. ” If a customer called to complain, there was no organized Nay for Freeholders operations people to find out what happened or to re-send the order on another truck.
According to Bradford, the companies ability to churn through customers, attracting thousands of new customers, then quickly losing them once they experience the poor service, provided most of the revenue. Attracting new users was expensive, requiring extensive online advertising and discounting prices. 5% of the customers ordered three times or less, then stopped using Freeholders. In 2008 Bradford took over as CEO (prior to this he was Board Chairman, and prior to that a senior executive of Principle. Com). He fired the existing CEO and many senior managers.
The software Mould have to track plant operations, along with data corresponding to some 200,000 active customers at the time and more than 8,500 products. It would take Freeholders two years to build this database. Roadwork also decided to upgrade Frothiness’s Web site, using the company’s internal database to profile customers and serve a customized online experience. For example, the site’s software can now analyze order patterns, reminding customers of their favorite products and suggesting other items they might like, a marketing tool that has worked well for Nettling and Amazon.
In addition, the database recognizes Nether a visiting customer is a new, infrequent, lapsed or loyal customer?and serves appropriate messages and ads. Critical to the success of Freeholders is a powerful IT infrastructure that seamlessly connects online customers to inventory, billing, and then to truck delivery. The firm uses SAP software (an enterprise resource planning system) to track inventory, compile financial reports, tag products to fulfill customers’ orders, and precisely control production down to the level of telling bakers how many bagels to cook each day and what temperature to use.
It uses automated carousels and conveyors to bring orders to food-prep workers and packers. Managers are able “see into” the order and fulfillment process at any point in order to identify problems. Alerts are programmed to automatically alert managers to emerging problems. Today, if a truck goes out 15 minutes late or if a container of Jalapeño hummus is left off an order, the problem can be traced to its source.
Freeholders also uses Nutcracker, Web site traffic and online behavior analysis software, to help it better understand and market to its online customers. At peak times, the Web site has handled up to 18,000 simultaneous shopping sessions. The final piece in the formula for profit is a supply chain that includes dealing directly with manufacturers and growers, thus cutting out the costs of middle-level distributors and the huge chains themselves. Freeholders does not accept slotting fees?payments made by manufacturers for shelf space. Instead, it KS suppliers to help it direct market to consumers and to lower prices.
To further encourage lower prices from suppliers, Freeholders pays them in four business days after delivery, down from the industry pattern of 35 days. Freeholders was profitable for the first time in 2008. The key to profitability has been improving their execution of the initial concept. In recent years, they have introduced the following “customer centric” ideas: Produce: Employed experts to rate the freshness of all produce and set prices accordingly. This reduces customer concerns about not being able to feel the reduce. Packaging: Eliminated the use of foam, and reduced the number of cardboard boxes by 1.
Million in response to customer complaints. Favorites: Developed a customer relationship management system that tracks each customers’ past purchases, and presents them on-screen for re-ordering. Increased order size by 10%. Recommender system: Added a YMCA (You-Might-Also-Like) cross-selling tool, which recommends products that other customers purchased. Added 5% to total revenue. Now in control of its logistics, and with powerful business intelligence tools, Freeholders increased customer loyalty and reduced its churn rate (the number of customers who leave the service).