Dutch supermarket company Ahold Delhaize, owner of Giant and Stop & Shop in the United States, among others, has acquired a majority stake in Bronx, NY-based delivery provider FreshDirect, giving it access to the largest grocery market as e-grocery is exploding amid the pandemic.
Private equity firm Centerbridge Partners is also acquiring a 20% stake in FreshDirect. The deal is expected to close in Q1 and terms were not disclosed. FreshDirect had been seeking a buyer for the past year, according to the New York Post.
While e-grocery delivery and curbside pickup have proven hugely popular since the lockdowns began in March, grocers have struggled with the cost and profitability in an industry that already has razor-thin margins.
A recent report from Mercatus and Incisiv projects e-grocery will reach 21.5% of grocery sales by 2025, up from single digits before the pandemic. A May consumer survey from Coresight Research pegged e-grocery growth in 2020 at 40%.
This deal is similar to Target’s 2017 acquisition of delivery provider Shipt to gain an advantage in local grocery and ecommerce fulfillment nationwide. Shipt kept its brand name and existing customers after the fact, and FreshDirect will also operate independently, maintaining its brand and business.
FreshDirect has a heavy presence in the tri-state area, delivering a wide variety of grocery items direct from producers to consumers, including fruits and vegetables, meats and poultry and deli and bakery goods. The company says it’s profitable, and it’s enjoying huge success as so many more shoppers are eating in vs. out and ordering groceries online.
David Bishop, a partner at e-grocery services and consulting firm Brick Meets Click, said FreshDirect gives Ahold an extremely strong consumer brand it can leverage in other markets to offer an online shopping service that attracts more upper-income households.
“The move by Ahold will help strengthen its positioning in the New York metro area, which is only becoming more competitive and a market that AmazonFresh has been targeting to grow further,” Bishop said.
He added Ahold’s scale and structure will help improve FreshDirect’s operating margins while giving its new parent valuable insights and capabilities into the emerging use of mirco fulfillment centers (MFCs) to reduce fulfillment costs and accelerate cycle times for ecommerce orders. FreshDirect has an existing relationship with MFC provider Fabric.
“This transaction marks an important milestone in the continued growth of FreshDirect,” said its CEO, David McInerney, in a press release. “I believe Ahold Delhaize’s global scale, focus on strong, leading local brands and ability to utilize cost-of-goods synergies, will allow FreshDirect to achieve its full potential.”
“FreshDirect is a leading local brand in the fast-growing online grocery sector in the New York City metro area, one of the most important ecommerce food markets in the United States,” said Frans Muller, Ahold Delhaize’s Chief Executive Officer in the release. “With its unparalleled quality of fresh food, exceptional brand recognition and dedicated people, it has generated remarkable customer loyalty. This acquisition further propels our omnichannel evolution.”
Sylvain Perrier, president and CEO of Mercatus, said the FreshDirect acquisition helps Ahold solidify online market share and the capacity for greater scale in the highly competitive tri-state market. But he wondered what it meant for Ahold ecommerce unit Peapod and its Peapod Labs, which operates in a similar space but with a different model and approach than FreshDirect.
“You can expect to see a blend of technical capabilities and know-how that will help Ahold grow its brick-and-mortar brands as competitive omnichannel grocery retailers in their local markets,” Perrier said. “But two technology strategies under one roof serving the same objective are never wise and will not lead to any impactful change that will benefit Ahold, unless it continues running both companies separately and relies on the cross-pollination of ideas and best practices.”
Brittain Ladd, principal of Six Page Consulting, said he sees increased M&A activity in grocery as players look to up their technology and fulfillment capabilities. Ladd also said he didn’t see Peapod fitting in the picture long term along with FreshDirect.
“I don’t believe Peapod is a good fit for Ahold-Delhaize and I recommend that the company divest it,” he said. “Consultants and Wall Street executives I’ve spoken with about this subject agree with me as do the founders of Peapod.”
Ladd said investment in MFCs was the path to ecommerce profitability for Ahold and others, automating much of the process.