During the current recession, companies are moving to the Internet at an accelerating rate, driven in part by the high fixed costs of offline distribution channels. As a result, ecommerce sales have steadily outperformed offline sales for several years now, and this pace should accelerate.
The company that epitomizes this Internet trend is Amazon.com Inc., which enjoyed its best holiday season in nine years in 2008, while traditional retailers were melting down. Amazon accomplished this mainly through two innovative strategies: 1.) by taking advantage of its virtual operating model; and 2.) by generating and using customer information more effectively than any of its traditional, offline retail competitors. Amazon's growth continued in the first quarter -- up 18% versus year-ago. And it's not just books and music, by the way, more than 40% of their sales are now in the "department store" categories they added after inception.
Today, many retailers are moving to the Internet hoping to emulate Amazon; they view this as an easy transition where they can pick up 'free sales' while saving on current infrastructure costs. But they are often unaware that the journey to the Internet is actually profound and challenging. At FreshDirect Inc., an Internet-based grocery delivery service in New York, we have learned that online customers are holding us to a higher standard. And if these customers can't get what they want, they can just as easily go to other online destinations.
At FreshDirect, our core mission is to change our customers' lives by giving them a superior on-line shopping experience. Our 'secret sauce' is our customer database, and the company's growing ability to use it to enhance our customers' experience. For as long as people have shopped with FreshDirect (which has been operating more than five years in the New York metro areas and is achieving real growth even today), the company knows the details of each time a customer has shopped on the site, every unit bought during those visits, and all service interactions. The company also knows exactly who its customers are when they enter the online store for a new shopping visit -- a loyal customer, a new customer, or a lapsed customer who has been away for awhile and needs to be welcomed back.
When you know your customer so well, you have the opportunity to change your whole managerial approach and really make the customer the king in your plans. This leads to what I call managing with intense customer focus.
At FreshDirect, the core of this intensity starts with daily focus. Each day our senior team starts with a formatted review of our immediate business -- yesterday, today, and tomorrow. Each manager uses customer-focused metrics to explain what is going right or wrong versus expectation and what we are doing about it. Shortfalls are addressed and successes are celebrated.
We bring additional customer focus by running about 140 customer surveys a year. We survey weekly, checking key metrics and items of topical importance like the economy or competition, and monthly on deeper topics such as product and service. We also analyze customers' verbatim survey responses to allow us to truly understand where customers have problems we can solve. For most businesses, this type of information is on the periphery of their operations. For us, it is at the center. With technology advances and proven analytical methods, there is no good reason not to use these techniques to get closer to the customer.
Let me give you a couple of examples of how we have used surveys to improve our business:
Packaging: Our customers rate our excess packaging as our most negative feature. I get some satisfaction seeing the broken down boxes as I walk around Manhattan, but our customers have told us loud and clear that this is a negative. Our excess packaging, however, is a result of a rather complex production process and it has been quite an effort to address this issue. But, given our customer focus, we knew we had to. We reworked our whole production process and are now reducing by 1.5 million boxes off a base of about 9 million annually. By the way, we know how this impacts every individual customer so we'll be able to communicate the improvement to each of them for every affected order. Of course, this saves us quite a bit of money, too -- service improvements usually do.
Produce: One of the key issues that customers tell us impedes their usage of FreshDirect is their inability to "squeeze the product". Or, in other words, to see what they shop for. So, again with major effort, we re-did our whole produce production flow (from buying to inventory management to fulfillment) and we now rate all our produce, daily, through a star system which appears on the site. More than 60% of our customers say they now use this service to guide their produce decisions.
Favorites: We have in our database each customer's entire history with us. We have an ability to database manage all this as the customer completes a visit and brings up on the cart page a few selected items, which are items the customer bought frequently in the past but not on this visit. We have only had this up for a couple of months and, already, 20% of our customers use it and they buy two more items, which is a 10% increase in their average order size. Our revenue generated is well above expectation.
Cross-selling: We also have what we call YMAL -- You Might Also Like -- otherwise known as cross-selling -- where we suggest various items customers might like to order to accompany an item in their cart. We have historically made suggestions based on our judgment of what items might be appropriately presented, but more recently we have used our database to suggests 6 items that customers have purchased alongside the featured item -- such as steak with steak sauce and potatoes. This feature, in addition to favorites, already contributes 5% of our total revenue.
All of these are examples of using our rich customer data, real-time, to enhance customer experience. Through this and similar steps, we have driven, year-to-year, the percent of our business done by loyal customers from approximately 25% to, last week, 59% of our total sales. The result of this is a happier customer and, obviously, more revenue for us. After all, it is cheaper and more effective to make current customers more loyal than to spend money attracting new customers. We are profitable and finished the first quarter with a year-to-year growth rate of 15% in what is obviously a particularly difficult economic environment.
But, of course, we can do better -- and we will. I believe real Internet marketing is still in its infancy. Too much attention has been given to digital advertising, and not enough to the creation of loyal customer relationships, which are especially valuable in the "one-click" purchasing environment. The focus on digital advertising has led to a proliferation of clicks and visitors (and declining conversion rates to boot), but has failed to capture the transformative power of the Internet. The true power of Internet marketing is the ability to interact to develop superior customer knowledge and real-time rhythm to significantly build one's business.
This Article is written By RICK BRADDOCK | Special to THE WALL STREET JOURNAL