Could the secret to success in online food retailing be temperature control?
If that proves to be true, there will be more than a little irony in it. Temperature control, after all, pertains to perishable products, which have been generally regarded as the Achilles' heel of online food shopping. Consumers, the argument goes, don't trust a third party to pick out their meat and produce, and want to squeeze the tomatoes themselves.
But what if an online service was so proficient in buying, preparing and storing perishables that it could guarantee quality as good as, if not better than, what stores offer -- at prices that are as good or better?
That's the strategy behind FreshDirect, a relative newcomer to the online grocery scene, based in Long Island City, N.Y., across the East River from Manhattan. Serving the New York Metropolitan area, FreshDirect, which started last September, is the brainchild of veteran gourmet-food retailer Joe Fedele, whose last venture, Fairway, is still regarded as one of the major destinations for fresh food in the New York City area.
In addition to stressing perishables, FreshDirect also runs counter to another piece of conventional wisdom in the online arena -- that it's better to pick online orders out of stores than special warehouses. FreshDirect's pride and joy is its 300,000-square-foot warehouse.
FreshDirect, as well as online food pioneer Peapod, contend that with their warehouses, they have tighter control of the cold chain than do brick-and-mortar supermarkets, and consequently can provide higher-quality products at lower prices. The quality control at their warehouses results from multiple temperature zones designed to optimize handling of various types of perishables. These multi-zoned warehouses include different temperature and humidity combinations for storing and processing perishables, as well as for cooking and order packing.
The results, declare the online grocers, are reduced spoilage, a higher-quality product, and a growing demand for their services.
The approach taken by FreshDirect and Peapod is unusual for online operators, observers say, and offers lessons for conventional retailers worth considering this week during the 112th International Association of Refrigerated Warehouses (IARW) Annual Convention and Trade Show. The show is taking place at The Westin La Paloma Resort & Spa in Tucson, Ariz., with a focus on "cost efficiencies and broader markets."
Preserving Muscle Tissue
FreshDirect's Fedele, its chief executive officer, is excited about the company's success thus far and predicts revenues of $100 million in the first year and approximately $225 million by 2004.
Driving that success is an emphasis on perishables, which make up 70% of FreshDirect's sales. "Where FreshDirect makes a difference is in its steaks, seafood and deli," said Fedele. "Some supermarkets can go as high as 50/50 perishables and dry goods, but that's it."
Fedele takes pride in the fact that like a neighborhood butcher, his company has a lot of experience in handling carcasses. It also houses a HAACP safety awareness and inspection facility on site, staffed by the USDA.
Also important to its success is FreshDirect's decision to buy directly from producers. "The curtailment of the supply chain helps us provide a better product at a better price," said Fedele.
As Fedele describes FreshDirect's buying strategy and its warehouse, he sounds more like a microbiologist than a grocer. "We buy our meat from the slaughterhouse and farms, and that enables it to hold muscle structure better," he explained. "When you cut open a steak, you are handling living muscle tissue. If it is temperature-adulterated, the bacterial count goes up and the cell structure breaks down if it cannot hold the temperature."
With FreshDirect's refrigeration system, he continued, the cell structure takes longer to break down. "Our temperature zones are perfect for each muscle tissue of plants and meats alike."
Fedele believes his facility handles perishables better than retail stores. "You do not want to process these commodities in an environment that would be comfortable to a consumer," he said. "For example, say that about 15% to 20% of a supermarket's cube is refrigerated; the remaining space is room temperature. You cannot have all of that warm air surrounding refrigerated units and expect them to do their jobs properly. [Because of that], the coils may ice up several times a day. The stores need heat to de-ice them, and that means blowing hot air on the product."
In addition to the icing problem, supermarket perishables may go through other warm-cold cycles, such as multiple stages of distribution, Fedele noted. Another problem is that some manufacturers mix different stockkeeping units on a single pallet, meaning there could be products with multiple temperatures close together.
The upshot of FreshDirect's focus on temperature control: less spoilage. Fedele said that spoilage is reduced eight- to nine-fold with the multi-temperature system. He cites a spoilage figure for FreshDirect of less than one-eighth of 1%, which he said is due more to weight loss during the manufacturing process than to actual food spoilage.
The FreshDirect warehouse's 12 temperature zones include a 14,000-square-foot freezer area, at minus-36 degrees Fahrenheit; meat and seafood storage rooms, each at 28 degrees; and a dairy storage and picking room at 35 degrees. The produce-ripening area contains four to six ethylene-and-humidity combinations, and range from 33 to 60 degrees.
Processing rooms include those for seafood (29 degrees), meat (34 degrees), and deli and cheese (35 degrees). Other processing rooms include a sorting room and a kosher meat room, each at 33 degrees, and a cold kitchen and a beef aging room, each at 34 degrees. In addition, a blast chiller room is maintained at 37 degrees; in that room, products such as prepared chicken are removed from the oven 95% cooked, and the temperature is lowered from 280 degrees using cold air (minus-36 degrees), which seals in the juices.
FreshDirect's refrigerator and freezer walls are composed of a combination of polyurethane and stainless steel, with the freezer walls containing eight inches of polyurethane.
At FreshDirect, goods are first placed in totes as they are picked, then removed from the totes and packed in boxes in each of the processing rooms. Completed orders are loaded on refrigerated trucks, kept at 34 to 35 degrees, with a frozen section at minus-20 degrees.
Toting Perishables
Another online grocer intent on ensuring the quality of perishable goods is 13-year-old Peapod, the granddaddy of online food retailers, based in Skokie, Ill. It operates warehouses in the Chicago and Washington areas -- its two largest markets. The company, owned by Ahold, said it is growing 25% annually, and is profitable in 4 out of 5 markets.
Peapod used affiliated stores' refrigerated cases for picking its online orders in Washington and Chicago -- as it still does in its other markets -- before moving to separate warehouses. At those warehouses, a small amount of processing takes places as well as some packing, baking, deli preparation, and home meal replacement.
One of the hurdles that Peapod faced early on was convincing customers they could buy perishables through Peapod. "They believed that they could shop better themselves," said Marc van Gelder, president and CEO, Peapod. "But then they saw that the quality of our perishables is higher than they would get at a supermarket, and that is due to the better temperature control."
One of the differences between Peapod and other online grocers is that it does not use refrigerated trucks to deliver orders. For perishable foods, Peapod uses frozen totes, which contain gel packs of dry ice for frozen foods, and chilled totes for produce, dairy and deli. "These totes improve the flow and help to provide the best delivery process," said van Gelder.
Like FreshDirect, Peapod separates food into different climate zones to help ensure the highest quality of its products. About two years ago, it closed its old distribution center and moved to a new one in the Chicago suburb of Skokie, which contains eight temperature zones.
Two of these zones comprise freezers: one at minus-10 degrees and the other at zero degrees. The refrigerated sections include a preparation room at 50 degrees, a meat room at 32 degrees, and a low-humidity dairy room at 36 degrees. The high-humidity produce rooms include one at 36 degrees, a pepper and green bean room at 45 degrees, and a banana and tomato room at 58 degrees.
The second Peapod warehouse, located in Gaithersburg, Md., serves the Washington, D.C., metropolitan area and has operated for about two years. Its five temperature zones include a minus-10-degree freezer, a 36-degree produce, meat and dairy room, a 58-degree banana and tomato room, a 50-degree preparation room, and a 36-degree dairy room.
At Peapod, the most recent technology advance came about two years ago, when it added a low-volume refrigeration unit in the produce room, which slowly drops the humidity as needed.
Maintaining the best possible temperature translates into reduced product spoilage. Peapod has reduced spoilage by 30% in Maryland since it began using five temperature zones. But unlike FreshDirect, which buys direct, Peapod relies on supplier sources such as [Cleveland-based] Stockyard Meats "to maintain integrity in the cold chain until the goods reach our facilities," said van Gelder.
