FreshDirect CEO Rick Braddock talks about groceries, expansion and the cost of mistakes

CEO Interview: FreshDirect heading to new markets

PORTLAND, Ore. — While some shoppers may want to squeeze the oranges and peruse the aisles, FreshDirect’s CEO Rick Braddock is confident many just want to click the mouse.

FreshDirect, one of the few remaining online grocers, came back from near failure and now Braddock is looking to expand the business.

The former CEO of online travel company Priceline, Braddock took over as CEO of FreshDirect in 2008. The company has more than 600,000 customers in New York, New Jersey and Connecticut.

Speaking by phone, Braddock, 68, discusses the privately held business with The Associated Press.

Q. There are some big names in the graveyard of the online grocery industry, Webvan comes to mind. How is FreshDirect different?

A. I was running Priceline around the time of Webvan, they were well-funded with what was basically free capital in those days and expanded very quickly and went bankrupt.

It’s 10 years later and what we learned is this is a hard business to run. It’s not as computer-based as Priceline … there are real employees, fresh food and delivery issues to deal with.

We’ve paid our dues, we’ve made a lot of mistakes, but right now we are fast-growing. We have a tremendous brand and great footing with our customers, and now we are positioned to expand.

The one thing Webvan did is scare venture capitalists away from online grocery for a decade. Food in this country generates $1.1 trillion in sales. If online grocers take 10 percent of that, in the top 25 markets, that is $25 to $35 billion in annual revenue. And there is no other dedicated online grocer like us.

Q. Safeway and Peapod provide online grocery service, but both are linked to major grocery chains. Now Amazon is dipping its toe in the water and Sysco recently said it is working on its own service, are you concerned?

A. Obviously there are some respected names on that list, and I could have specific comments about each one of them. But as I said, since we have run our business pretty well… some competition is kind of a good thing. And we’ve got certain advantages.

Q. Certain advantages?

A. If you start with Peapod and Safeway - that is a hybrid model. The online service is cobbled on to the physical stores. Peapod fulfills orders by using the same warehouse as the grocer. That means it has a much longer supply chain (to get food from suppliers to customers), we deal with fresher food.

Q. FreshDirect pushes the fact it doesn’t have a middleman and gets food directly from the source. So are shoppers using the service for convenience of delivery or quality?

A. You absolutely have to have quality and freshness, that is what the business is about. Whether you are an offline store or online competitor you have to have that or you aren’t going to get customers.

As for the convenience, customers have so much more control over their shopping experience. The appeal of our brand goes way beyond the convenience of delivery, which is why we are going to be able to succeed nationally, not that we are going to go national right away. But everyone buys food, and this is a smarter way to buy food.

Q. FreshDirect is considering expansion to Boston, Philly or DC. What is your ultimate goal?

A. We haven’t said precisely where we are expanding to yet. We are raising money for the expansion and when we get that we will announce the location of the expansion.

We know from our experience in New York how to manage all the key components of the business and that we can expand population center by population center. Expansion won’t take three years like it did in New York because we know how the business operates, it will take about a year and it will be a rolling expansion.

Q. No worries about over-extending?

A. Not really. I think our job in execution is to make sure we don’t do that. There is a massive market and it’s an idea that gets a good response.

Q. Is there an appetite for this kind of shopping outside of dense urban markets?

A. I think every market has different characteristics. Our average order in New York is $120-$125 and in the suburbs it is $20 to $30 higher. If you go to the Hamptons — where we do business in the summer — the average order is $250.

Although it appears smaller markets have higher expense — such as transportation — there are offsets.

Q. FreshDirect has had some tough times. It was only a few years ago that immigration issues nearly decimated your staff and you were plagued by customer service problems for awhile. Are those issues behind you?

A. Yeah, in fact the sequence is that I stepped into the CEO job more or less at the time of the immigration issues, which were a sad time for the company. I am able to be outspoken about that but I seem to get in trouble when I do. But we lost a lot of great employees and that nearly brought our business to its knees.

At the same time, we were also just not doing a good job with customer service and were churning customers.

I don’t want to make myself out as a hero, but when I stepped in we froze all our new customer activity for two years. We didn’t take on any new customers and spent two years fixing our service.

Before that we had lots of trial customers but that isn’t worth anything unless you can turn them into loyal business.

We were still able to grow modestly during that time…that got us to the end of 2009 when we grew by about 9 percent in revenue to $250 million. That was not shabby given the economy we were in. And at the beginning of 2010 I felt we had fixed our service and we expect revenue to hit $300 million.

Q. Last year was your first profitable year, what changed?

A. Our service was dramatically so much better. I often say, “It costs a lot of money to give bad service.”

You have to chase those problems down and remediate them. Now that we’ve fixed all that, we are in acceleration mode.