Retailers

Why Ahold Delhaize Put FreshDirect in Its Basket

Photograph courtesy FreshDirect

Ahold Delhaize officials see FreshDirect as a unique asset in and of itself, but in the big picture of its U.S. retail portfolio—and in the familiar go-to-market language of the company—it’s just another “great local brand.”

“That’s how we operate across the globe,” Farhan Siddiqi, chief digital officer of the Netherlands-based international retailer, said in an interview with WGB following the announcement that it was acquiring the New York-based e-commerce pioneer.

At Ahold Delhaize, store banners aren’t referred to as “banners,” “operating divisions” or “regional offices” but as “great local brands.” And FreshDirect, in Siddiqi's estimation, possesses all the qualities the company might look for in one.

“It’s an outstanding brand with great recognition. It’s one of the pioneers in online grocery delivery for the last 20 years, and has a good value proposition in terms of fresh, with over 60% of the SKUs being fresh foods,” he said. “The value proposition in terms of convenience is very strong, with next day delivery, same-day delivery and now express delivery. It’s got a very loyal fan base that shows very high retention—something like 80%—and a very high NPS [net promoter score], a record high on that.

“So when you look at all these opportunities, it’s a great asset that fits very nicely into our portfolio and is also complimentary to the areas where we don’t have a strong, meaningful presence,” he continued. “The customer base does not overlap with ours. It’s a new set of customers that are very loyal. It’s a new demographic for us. And when you step back and look at  New York, online grocery is one of the most important markets in the U.S.—it’s almost a $9 billion market that indexes higher in terms of penetration compared to the national average, and is expected to grow at a higher rate.

“So when you put all these together, to me, it’s a no-brainer how this really fits in. And on top of that, this where the world is going now. So to me, it's a very exciting time and a very natural fit.”

In this sense, what Ahold Delhaize is buying is something akin to a few dozen stores in a contiguous market with good growth characteristics, surrounded on all sides by a market-leading suburban brand in Stop & Shop, and largely crammed onto the island of Manhattan. It’s a formula that has served FreshDirect well for nearly 20 years, developing a loyal following that’s largely batted away incursions from Amazon and Walmart’s Jet.com subsidiary, and even Ahold Delhaize’s own Peapod brand when it had ambitions to make it in Midtown.

“We’ve stayed true to our original mission, which was really just to make great, fresh food, easy to get,” David McInerney, CEO of FreshDirect, told WGB. “That’s what we started with 20 years ago. And that’s where we are today. And as an organization, we’ve been incredibly narrowly focused on just that: Thinking about the consumer, thinking about the quality of food and how to make it as seamless, frictionless, and as positive an experience as possible. And I think what that’s done is that's created, you know, a bit of an iconic brand and incredibly loyal, almost fanatical customer base.”

FreshDirect in the meantime has long harbored ambitions to grow beyond its Manhattan stronghold, making recent progress in suburban markets—including Long Island, Philadelphia and Washington, markets where Ahold Delhaize has exiting local brands. Without divulging its vision in detail, Siddiqi hinted at the opportunity to broaden its base in those markets behind FreshDirect’s strengths with demanding customers and fresh foods.

“I think the focus for now is to really stay within our geographies and further penetrate those, building up the customer base,” he said. “We we see lots of opportunities for marketing and improved technology and user experience that we think will help us, even in our existing geographies, get a much deeper customer base than we had before. And I think now with the acceleration of the adoption of online and the acceptance of online usage, it’s really grown exponentially, the potential within those markets or on anything you’d add to them.”

Survivors of Dot-Com 1.0

Sources estimate that privately held FreshDirect had about $600 million in sales in fiscal 2019. The onset of the pandemic this spring added to that total considerably, even though officials confessed that the suddenness which the demand hit temporarily overwhelmed FreshDirect’s ability to absorb it all.

A purchase price for the business—Ahold Delhaize is acquiring 80% of the company with New York investment firm Centerbridge Partners kicking in 20%—was not disclosed. Ahold Delhaize said it would pay for its share using cash on hand, another signal of the benefit of improved sales volumes that have come with the pandemic.

Burt P. Flickinger III, managing director of Strategic Resource Group, a New York consultancy, estimates a price of around $300 million, although WGB could not immediately confirm a figure. Flickinger characterized that as something less than the $1 billion that FreshDirect’s investors might once have dreamed on.

“It’s a very good get for Ahold, considering the failure of Peapod to make any kind of inroads in Manhattan or in New York City,” he said. FreshDirect in the meantime has had to overcome service glitches associated by its 2018 relocation from a capacity-constrained Queens facility to a larger “state-of-the-art” hub in the Bronx. That facility was designed with greater volumes in mind that have been slow to materialize, according to Flickinger.

Peapod—like FreshDirect, a survivor of the original dot-com era that wound up under Ahold’s wing—has since been absorbed into Ahold Delhaize’s local brand strategy, enabling banners such as Stop & Shop to go to market as omnichannel brands and no longer marketing itself as an e-commerce brand. That left Ahold Delhaize virtually shut out Manhattan and many parts of the populous and wealthy five boroughs where FreshDirect was strongest. That Walmart similarly failed to make a viable business of Manhattan shoppers behind its Jet.com strategy is another indicator of FreshDirect’s stronghold there. Walmart along with Amazon was reportedly said to have “kicked the tires” on a FreshDirect acquisition in the past.

Asked if FreshDirect called Ahold Delhaize or the other way around, McInerney said: “We’ve known each other for a while. I think we’re two brands that respect each other.

“Over the years, there’s been lots of interest from different people [in an acquisition],” he continued. “But personally, I am really excited on where we are today. I think this deal will really allow FreshDirect to continue on the path that we’re on, and further that same mission of really just delivering great, high-quality fresh food with a fantastic partner in all abilities. Our mission and our values are aligned.” 

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