Ahold Delhaize's greatest challenge is making online grocery profitable
The FreshDirect deal deepens Ahold Delhaize's East Coast penetration, but more importantly, it provides another online resource and learning lab at a critical time.
With its majority acquisition of FreshDirect, Ahold Delhaize will own not one but two foundational companies in grocery e-commerce. The result will be the richest base of expertise and proprietary technology in online grocery among conventional players.
Over the years Ahold Delhaize has used Peapod, the dot-com era e-grocer Ahold USA bought in 2000, as both a standalone service and as an innovation center for online orders filled through its brick-and-mortar stores. That balance has shifted over time toward the latter strategy. These days, the brand lives on as Peapod Digital Labs, the operational brain of the grocery conglomerate's e-commerce strategy.
FreshDirect is also a dot-com era operator and has its core market in the Northeast. And like Peapod, its main value promises to be as a learning lab for Ahold Delhaize. Having a pure-play service helps the food retailer fill in market gaps in places like New York City and add incremental sales up and down the East Coast. But Ahold Delhaize’s greatest challenge these days is making online grocery profitable for its five store-based brands in the U.S.
Specifically, FreshDirect can help the grocery conglomerate further advance its fulfillment operations beyond stores. This is imperative for retailers operating in dense markets where online demand is growing. Most stores can handle the current pandemic-driven demand, but their fulfillment operations are not very efficient, particularly if workers are picking orders directly from the aisles. And like the early days of the pandemic showed, there are limits to what stores can fulfill from within their four walls.
FreshDirect has never had to rely on consumer-facing locations to fill its orders, and Ahold Delhaize can turn to its network of dark stores and warehouses to scale e-commerce capacity. Particularly in large metropolitan areas like New York and Washington, D.C., FreshDirect facilities could fill the company’s orders as well as those for brands like Stop & Shop and Giant Food. It’s not hard to imagine FreshDirect scaling into additional urban markets while Ahold Delhaize’s store brands handle the outlying markets, with facilities built to fill orders for both streams.
Ahold Delhaize has built “warerooms” — dark locations adjacent to grocery stores — as well as online warehouses and automated facilities. But it could probably learn a thing or two from FreshDirect’s operations, which formed in the pressure cooker of the country’s most population-dense city. FreshDirect knows how to route large fleets across battleground urban markets, and its production facilities are able to meet New Yorker’s high standards for prepared meals, fresh meat, produce and more.
When I lived in New York City, before decamping to the Northwest nearly three years ago, my family always made sure to order fish, fruit and vegetables from the grocer because we found them to be fresher and more cleanly prepared than what any local store offered. Ahold Delhaize should take a close look at how FreshDirect manages perishables — a sticking point for many online consumers who don’t trust grocers’ handling of these items.
It will also likely want to study FreshDirect's 400,000-square-foot automated distribution center in the Bronx. Although that facility face-planted when it opened in 2018, by all accounts it's now firing on all cylinders and could provide a tech boost to Ahold Delhaize's existing facilities. Such a facility could become the company's answer to the Ocado fulfillment center, with future locations built in markets where demand is high online and across stores. The FreshDirect facility has nine miles of conveyor belts and combines robotic sorting in a multi-temperature environment with human workers packing orders.
Pradeep Elankumaran, co-founder and CEO of online grocer Farmstead, said the pandemic has forced grocers to look beyond their stores to address online fulfillment. Farmstead relies on dark stores to deliver groceries in San Francisco and in North Carolina, where it recently added service. It also supplies technology to other retailers.
“I haven’t heard anything about stores for the past four months from any of the grocers I’ve been talking to. They’re all talking about warehouses,” Elankumaran said.
Kroger is working with Ocado to build large-scale automated warehouses, and Albertsons is moving rapidly into micro-fulfillment. By acquiring FreshDirect, Ahold Delhaize should be able to scale further into warehouses and dark facilities without having to rely on third-party companies, Elankumaran said. “It is the right move to acquire a company that can accelerate online growth, and [Ahold Delhaize] is essentially moving away from the Peapod model and now toward the FreshDirect model, which is better.”
Ahold Delhaize is very good at taking the strengths of its different brands and mobilizing them across the company. So there’s no doubt it will look to mine what it can from FreshDirect for the greater good. The tricky part will be managing its expansion in balance with its other retail brands. Where does FreshDirect expand in relation to Stop & Shop? And how does it add incremental sales in the Washington, D.C., market without stepping on Giant Food’s toes?
The finer points of where FreshDirect fits into the company map will get sorted out. What’s notable right now is that this is a smart acquisition at a crucial time for Ahold Delhaize. Supermarkets have had the wind in their sails during the pandemic, but those winds will eventually subside, and retailers will have to adjust to accelerating competition and the continued migration of orders to the margin-dilutive online channel. In this environment, retailers have to make bold moves or risk going out of business.
