Analysts believe 2015 is going to be "the breakthrough year of online," which could pose a challenge for food manufacturers.

Analysts believe 2015 is going to be "the breakthrough year of online," which could pose a challenge for food manufacturers.

The internet and the rapid development of multichannel has had a monumental impact on the FMCG sector, necessitating a seismic shift in the way food makers do business. With multichannel playing to consumer demand for convenience, this trend seems set to accelerate in 2015. The food industry could have a challenging year ahead as it struggles to keep pace with the rate of change. Hannah Abdulla explores.

In 2015, consumer demand for value and convenience is only set to heighten. With the internet playing in to both of those demands, Cyrille Filott, global strategist at Rabobank, believes this year is going to be "the breakthrough year of online".

Filott points to the recent build-up of supermarket collection points in countries across Europe. "The [digital] impact is likely to be felt over the next one-to-two years in terms of how food producers package and market their stuff and how they work with retailers and other online sales channels," he adds.

For the consumer, the internet has transformed the way they can shop, allowing options of whether to buy online or in-store, price comparisons and product research at the click of a button. For food manufacturers, the channel presents huge complexities.

"Every single company, especially the producer, knows multichannel is critical to growth. The challenge is very few can do it profitably," EY global consumer products analyst Andrew Cosgrove says. "It comes down to the complexity and cost of doing it. The problem is that the cost of delivery is far higher than the amount consumers are paying for delivery. But because e-commerce players are setting a standard for what that looks like, the producer can't avoid it."

However, the rise of the Internet has also presented opportunities for food manufacturers. A start-up can build up a following quickly. Cosgrove says in a digital age barriers to entry "don't exist". Together with the rise of social media, for the new guy the Internet is a haven. That presents a problem - and one that is rapidly evolving - for established mainstream manufacturers. 

"You have disruptive players coming in from the outside, you don't see where they are coming from. It's very hard. How companies respond to these smaller companies is a big test," says Cosgrove.

A number of major FMCG companies are working to expand their digital presence, a clear indication of how integral the channel is becoming. One example is last month's announcement that pasta maker Barilla was teaming up with US online grocer Peapod, to launch a range of pasta meal kits in the country through online grocery orders.

And supermarkets too are capitalising on the online opportunity. At the IGD online retail conference in London during November, Wal-Mart's UK arm, Asda, said it was increasing its focus online in a bid to offer customers more convenience and accessibility. One thing it did point out however, was that it was focusing on being competitively priced. Online boss Chris Conway said "customers are now better off shopping online than in-store".

But it is this sort of promotional activity and focus on offering lower prices that is causing concern among the industry. Earlier this month India's Britannia Industries launched a cookie product on amazon.in, 15 days before it was due to hit traditional supermarket shelves. Britannia claimed it was the first such company to make a move like this in the country and hoped it would be a learning experience for the FMCG industry at large.

But like much online retail in India, according to Kaushika Madhavan partner at the India arm of AT Kearney, the launch involved promotional activity in the form of free delivery.

"For an FMCG firm, delivering single packs of food is a very unprofitable proposition on a sustained basis," says Madhavan. "When you consider a single food item at US$1.50, the cost of delivery is already higher.

"Right now they [manufacturers] are capturing market share [online]. A lot of their customers are coming from the fantastic deals and promotions they offer. But how sustainable is that? Over time they're not going to be able to offer as many deals as they are today."

Of course, like anything in its early stages, teething problems will arise. And in every market, the online picture will look different. Filott points at how in the US, online grocery retailing takes a different route with Instacart and Amazon, compared with the UK's supermarket-based grocery retailing channels like Ocado. Either way, the challenge is the same. "How can you make sure you are bought online?" he asks.

Cooper Smith of BI Intelligence advises that for manufacturers of exotic foods or speciality ingredients - those items that supermarkets do not typically carry - the channel is of great benefit.

However at present, online as an option for buying groceries still lags behind traditional stores and this will continue to be the case until it can turn over inventory as quickly as supermarkets. Consumers demand freshness. And until quality and freshness of all produce can be maintained to supermarket standards, traditional stores will continue to lead the way, says Smith.

While stores are still important today - according to EY, 93% of revenues globally come from traditional stores - that is set to come down. In the next five years, that figure is predicted to drop to 80%. Online cannot be ignored and the challenges of making it a profitable channel for food manufacturers must be addressed.