As tensions between manufacturers and retailers continue to grow over pricing, fmcg players are starting to investigate new ways of growing sales – by cutting out the retail middleman and selling direct online. But does the maths stack up, asks Michael Carolan

For fmcg suppliers success has always rested on listings the bigger the better, the more the merrier.

However, growing numbers of manufacturers are starting to bypass their traditional retail partners and are beating a path direct to their consumers' doors, via online stores.

While the jury is still out on the e-commerce potential of social networking sites such as Facebook and transactional platforms like Amazon, e-stores are a different story. IGD research last month revealed that 27% of UK food and drink manufacturers are considering building their own e-stores in a bid to engage directly with shoppers online.

Their thinking is simple. Forget third parties (whether bricks-and-mortar retailer or online). Selling direct is where the real opportunity lies. But how big is that opportunity and what risks are entailed?

Looking at the projections for online retail, the move looks like a no-brainer. Online grocery sales are predicted to hit £9.9bn by 2015 twice the value at the end of 2010 and are increasing at a faster rate than any other sector in grocery, with growth of 21.4% last year alone [IGD].

Furthermore, 43% of manufacturers expect to generate up to 10% of their total revenue from online channels by 2015, versus 18% of manufacturers now.

This 'digital revolution' will reshape the grocery industry, believes IGD chief executive Joanne Denney-Finch. "The strong growth predicted for the online grocery channel presents an opportunity for companies of all sizes and types," she says. "It is encouraging to see manufacturers looking to flex their business models, participate in the digital explosion and engage with consumers in different ways."

One fmcg group 'flexing' its business model is Procter & Gamble. Online sales of the giant's products are climbing by up to 25% a year thanks in large part to the launch last year of a US website dedicated to selling P&G products.

Although it hasn't gone the whole hog in the UK just yet it claims it currently has no plans to replicate the US sales operation here the company made tentative inroads into online selling last year when it started listing Max Factor and Pampers products through Amazon.

It won't be drawn on the potential size of the pie revenue-wise, but says the benefits of interacting with consumers online go beyond cold hard sales. The online environment provides an invaluable insight into online shopping behaviour, argues Tonia Elrod, P&G global digital and eCommerce communications director.

"We're not a retailer and we don't seek to be one," she claims. "But we need to understand what people want when they're shopping online. It allows us to plan in terms of R&D and innovation."

Crucially, this insight into shopper behaviour can be gained for a fraction of the cost of observing habits and patterns in-store, says Carsten Krauss, director of Omikron FACT-Finder. That's one of the key reasons that direct selling is gaining traction at the moment.

"In an online store you can measure every click, every viewing time, every item put into the basket and every item removed later, of every customer, even if there are millions of them. This opens up huge possibilities for data mining," he says. "Which products do customers click on before they buy other items? Which sizes do they want? Which pictures lead to purchase? Which don't?"

Direct selling also offers smaller fmcg players the chance to really punch above their weight. Not only can they cut out the middle man, they can also build a loyal and potentially national sales base quickly and, more importantly, they can retain a tighter control on prices.

"For the product we produce, on the scale we produce it, we can't afford a middleman," says Michaela Doherty, a director at Jimmy's Farm. "The direct relationship with our customers also gives us the power to increase sales based on knowing exactly what the customer demands."

This all sounds great but there are some obvious barriers to wider take-up, the main one being the cost of delivery. For 59% of shoppers, the removal of delivery charges is the single-most important factor that would drive them to shop online for groceries [IGD ShopperTrack October 2010]. Many currently see it as too time-consuming to place orders on websites and delivery as too expensive.

However, for many suppliers the average spend on a website is too low to offset the cost of shipping. "I can't send out a single packet of my sausages because it would cost as much in postage as it would to buy the packet," says The Black Farmer founder Wilfred Emmanuel-Jones.

One solution is a series of smaller suppliers collaborating and creating a business model like Amazon's, he believes. "I would love to see a network of independent producers working under one roof and funding a distribution network that delivers goods."

Another is to reduce the delivery charge or deliver free if an order is over a certain value or size. For larger goods, the maths could well already stack up, says Krauss. "For heavy and costly items such as Pampers there may be a niche," he says. "With items like this, it is obvious that young parents will need more than one box over time so P&G could offer a six-for-five deal, for example."

Of course, even if such a service is launched, it's unlikely consumers will completely bypass bricks-and-mortar retailers in favour of online. But with the creation of e-stores also offering direct contact with the consumer and higher margins, you can bet more manufacturers collaboratively and individually will soon be following P&G's US precedent.