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Teaching Note: Case 30 – FreshDirect: Is It Really Fresh?
Case Objectives
1. To investigate how to compete in a crowded industry.
See the table below to determine where to use this case:
Note: Although this case is best positioned as a business and entrepreneurial strategy case, it can
be used to illustrate almost all of the other chapter concepts, therefore becoming a
Chapter Use Key Concepts Additional Reading and/or
Exercises
1: Strategy Concept Strategic management
2: External
Industry competition five forces;
NOTE additional reading, web
3: Internal Analysis Value-chain analysis; resource-based
4: Intellectual Assets Intellectual, human & social capital
5: Business Level
Competitive strategy; generic
NOTE additional reading, web
8: Entrepreneurial
Strategy
Opportunity recognition
9: Strategic Control Informational vs. behavioral control
10: Organizational
Design
Organizational structure
Leadership
Innovation
Case Synopsis
First launched in July 2001, FreshDirect was a New York City based online grocery store with a
state of the art production center, top-notch personnel, leading edge manufacturing software, the
highest standard of cleanliness, health & safety, and an informative and user-friendly website.
The ideal FreshDirect customer was described by Jason Ackerman, one of the founders, as
someone who buys their bulk staples from a warehouse like Costco on a monthly basis, and buys
Early on the online segment of the grocery industry was a small percentage of the industry total.
Despite a large potential target audience, the on-line segment had been slow to catch on. The
FreshDirect’s competition came from traditional brick-and-mortar grocery chains and a handful
of other online grocers in New York City. The challenge was to compete on price while covering
As the online grocery market continued to define itself, FreshDirect’s challenge was to continue
to innovate in product purchase, storage and distribution, and attract loyal customers while
Teaching Plan
The FreshDirect case is a good way to demonstrate how innovation and entrepreneurial strategies
can be essential to sustaining a competitive advantage in a crowded industry. Since this case
ICEBREAKER
Since probably all students have bought groceries, it might be illustrative to ask:
How many of you would be willing to buy groceries online?
Some students might be familiar with this concept, through a service in their area, but some will
also be hesitant, especially about buying produce or fresh meat or fish – Who picks out the ripest
tomatoes for me? If students have difficulty visualizing this type of service, visit FreshDirect’s
website. You may have to provide a zip code to enter the site (try using Pace University’s lower
Manhattan zip code 10038):
The instructor might put a list on the board: what are the pros and cons of this approach to
grocery shopping from the perspective of the customer? Ask students if they were going to be
Before engaging in discussion, you might want to test student’s basic knowledge regarding the
Which of the following statements is most true?
a. 70% of New Yorkers cook from scratch multiple times a week.
b. FreshDirect is a subsidiary of Fairway Supermarkets.
c. FreshDirect contracts out its delivery service to save on operational expense.
d. FreshDirect has had four CEOs since its founding.
ANSWER: a. About 70 percent of New Yorkers cook from scratch multiple times a week, and 30
percent cook multiple times a day. FreshDirect co-founder Joseph Fedele was also a co-founder
Normal supermarkets carry about 5,000 perishable products, while FreshDirect focuses on only
about 2,200.
a. Yes
b. No
ANSWER: b. A typical grocery store carried about 25,000 packaged goods, which accounted for
approximately 50 percent of its sales, and about 2,200 perishable products, which accounted for
Summary of Discussion Questions
Here is a list of the suggested discussion questions. You can decide which questions to assign,
and also which additional readings or exercises to include to augment each discussion. Refer
back to the Case Objectives Table to identify any additional readings and/or exercises so they can
be assigned in advance.
1. How did FreshDirect use strategic management, and what were key forces in the general
and industry environments that affected FreshDirect?
2. What internal resources and assets did FreshDirect have that gave it a competitive
advantage?
3. How did FreshDirect compete?
4. What competitive dynamics affect FreshDirect now?
Discussion Questions and Responses
1. How did FreshDirect use strategic management, and what were key forces in the
general and industry environments that affected FreshDirect?
To start with, the instructor might want to position the discussion by reviewing what strategic
management really is:
Referencing Chapter 1: Strategic Management
Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter
1, Exhibit 01: Strategic management consists of the analyses, decisions, and actions an
organization undertakes in order to create and sustain competitive advantages:
●strategy directs the organization toward overall goals and objectives;
●includes multiple stakeholders in decision making;
Leaders face a large number of complex challenges. Leaders must be proactive, anticipate
change and continually refine changes to their strategies. This requires a certain level of
During strategic analysis, the leader does “advance work” to anticipate unforeseen
environmental developments, identify unanticipated resource constraints,and assess changes in
In strategy implementation, depending on the type of organization structure, the leader might
include key individuals in a discussion around selecting which strategies might be best to
implement at which level within the organization. The leader must ensure proper strategic
The basic question strategic management tries to answer is: How can we create competitive
advantages in the marketplace that are not only unique and valuable but also difficult for
competitors to copy or substitute?
An interesting question we can ask at this point is: what IS that “marketplace”? What business
is FreshDirect in? Some might say groceries, but some might say online retail or product
delivery. The answers to this question will help us understand the importance of vision and
Given FreshDirect’s roots in the “fresh” produce business, AND its decision to provide the
online interface, it could be considered to be in the online grocery business. Answering this
Referencing Chapter 2: Analyzing the External Environment of the Firm
Organizational leaders must become aware of factors in the overall environment that might affect
their ability to create a competitive advantage. So how do managers become environmentally
Environmental scanning involves surveillance of a firm’s external environment to predict
environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint
Environmental monitoring is a firm’s analysis of the external environment that tracks the
evolution of environmental trends, sequences of events, or streams of activities. Leaders need to
What factors or trends might be most important to FreshDirect? To assess how the external
environment might affect FreshDirect’s strategy, it’s necessary to take a look at the factors in the
Political-Legal: State and city consumer & health regulations, labor issues (unions &
Economic: Concerns about the price of consumables drives many consumers to shop in bulk for
the anticipated savings. Profit margins are tight, with product spoilage a major issue, so planning
Demographic: Rising levels of affluence may give the grocery industry a boost because families
may have more discretionary dollars to spend on food, especially where they perceive an
Sociocultural: A greater concern for healthy diets and physical fitness increases the desire for
“fresher”, higher quality produce. Customers can also save valuable time by shopping online and
Technological: Developments in technology and new uses for existing technologies can help
It’s also necessary to assess the segments of the external competitive environment that include
Rivalry
Very High
Substitutes
Buyers’
Power
Med
Suppliers’
Power
High
Suggested: It is hard to create
a competitive structure, so the
Suggested:
negotiating power
Suggested: High – especially
for produce and meat, since
Suggested: the brick and
Based on the external environmental factor analysis, although there are not many rivals, the
online grocery industry has many challenges to profitability. The fact that this business model is
NOTE – ADDITIONAL WEB LINKS TO INDUSTRY INFORMATION:
An article from July of 2011 explains customers’ key concerns: higher prices, shrinking package
sizes, gas prices reducing trips to the store, concern over product nutritional labeling, demand for
healthier food options; and an increasing number of shoppers using mobile devices to check
From 2014, here’s one opinion about how the digital shopper is changing the competitive
landscape: “The desire for same-day, on-demand grocery delivery is rapidly growing and
services like Google’s Shopping Express, AmazonFresh and Uber’s Corner Store have quickly
stepped in to fill the gap. These services create yet another fragment on the shopper’s path to
purchase – expectations are mounting for retailers to possess the capability to get food and other
grocery items to their doorstep at a moment’s notice. While currently only operating in certain
cities across the U.S., the convenience grocery delivery services offer will certainly fuel their
popularity…. [In addition] 54 percent of online consumers use social media to discover new
foods and share food experiences. What’s for dinner is decided hours before the actual meal and
often by visiting a social site such as Pinterest. In fact, curated Pinterest boards have rapidly
become the modern recipe box.” See more at:
http://www.progressivegrocer.com/departments/technology/five-new-ways-reach-today
%E2%80%99s-digital-shopper?nopaging=1#sthash.Fl7pUpCw.dpuf
These appear to be opportunities for online grocery stores. Does this mean that an online grocery
shopping solution makes more sense in this environment?
Data from 2012 indicated that online grocery sales represented less than 1 percent of the $850
million in U.S. food retail sales, but experts expect the segment to grow 9.5 percent annually, to
reach $9.4 billion in 2017. Citi analyst Deborah Weinswig said the top three online grocers
currently are Royal Ahold's Peapod with 8.8 percent of the market, FreshDirect with 5.7 percent
and Safeway with 3.2 percent of the market. See http://www.retailleader.net/top-story-
industry_news-online_grocery_sales_to_grow_9.5__annually_from_small_base-2363.html
According to one report in 2013, “the battle between traditional brick-and-mortar grocery and
alternate channels was heating up, with analysts and pundits trying their best to predict who will
control the market in the future. Meanwhile, consumers are reaping the benefits of at-home
delivery services in the digital world and a store perimeter rich with fresh, healthy, ready-to-eat
products in the ‘real’ world. In fact, some say fresh food might be the single most important
Regarding direct competition, Stop & Shop’s Peapod started providing delivery in Manhattan in
March of 2011 (see http://www.nytimes.com/2011/03/12/nyregion/12peapod.html for the full
story), and it appears Wal-Mart may be entering the online grocery delivery service with a test in
Go to http://gothamist.com/tags/freshdirect and search for news in the NYC area about current
issues related to FreshDirect. Some are surprising, including a lawsuit intended to stop
What appear to be the key external and internal issues that online grocers need to pay attention
to?
2. What internal resources and assets did FreshDirect have that gave it a competitive
advantage?
Referencing Chapter 3: Analyzing the Internal Environment of the Firm
When one firm tries to outperform others, it’s important to figure out how this could be done.
The answer may lie in how that firm arranges its activities and creates unique bundles of
Remember, value chain analysis is a strategic analysis of an organization that uses value-creating
activities. Value is the amount that buyers are willing to pay for what a firm provides them and is
Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities.
A sample value chain analysis is below:
Value chain activity How did FreshDirect create value for the customer?
Primary:
Inbound logistics (distribution
Instead of going through an intermediary, FreshDirect
Operations (efficient work flow
design, quality control systems)
Investment in a state-of-the-art production facility
meant cost-effective, efficient and quality controlled
Outbound logistics
(consolidation of goods, efficient
Location of the production facility near to Manhattan
reduced delivery time. Scheduling of delivery times to
Marketing and Sales (motivated
sales people, innovative
FreshDirect made a decision to use imaginative
advertising, word of mouth and innovative offers to
Service (ability to solicit
customer feedback & respond)
Information on food nutrition, preparation, price
comparison was much more available online, provided
an added service to the customer and facilitating
were not obvious. The online environment allows for
such feedback, but was FreshDirect set up to respond?
What about product returns and refunds?
Secondary (or support):
Procurement (win-win
reduced dependence on single
supplier)
Industry-wide high product costs affected product
Technology development (state
of the art hardware & software,
Decision to use state-of-the-art technology to design the
production and distribution network meant it may be
Human resource management
Decision to hire product experts and use company
General Administration
Founders Joe Fedele and Jason Ackerman had direct
establish goals & strategies,
management communication,
relationships with diverse
stakeholders)
appeared passionate about the business, willing to learn
Primary Activities
In terms of primary activities, the key to FreshDirect’s ability to differentiate itself in the market
resided in its operations and marketing. The operation was designed from the beginning to
Support Activities
With regards to support activities, a competitive advantage is achieved by developing a strong
general administration that is built around visionary leadership and a culture that pushes for
technological innovation. Although FreshDirect had this in the beginning, there had been some
mistakes. Was current leadership stable enough to learn from those mistakes?
In addition, see the concept of the resource-based view of the firm, and the three key types of
resources: tangible resources, intangible resources, and organizational capabilities. A firm’s
strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a
An important issue to focus on here is the importance of intangible resources like innovation and
reputation. Look at resources that are controlled by FreshDirect that might enable it to develop
and implement value-creating strategies. Based on their reading of the case, students might
identify those resources to include:
Tangible Resources:
Financial: Private investors and a training grant from the State of New York
Physical: Up-to-date production and distribution facilities
Technological: Production and distribution facilities designed specifically for the product to
