Are Procter & Gamble Co. and Kroger Co.—the world’s largest maker of consumer packaged goods and the biggest U.S. grocery chain, respectively—on a collision course?

P&G this month announced it will establish a dedicated online site, or eStore, to sell its products directly to consumers. It won’t own or operate the site, and it says it has no desire to get into retailing. But the new site will inevitably compete for sales with traditional brick-and-mortar grocers.

Last month P&G pulled out of a two-year-old online-coupon scheme with Kroger that allowed shoppers to download online coupons for P&G products to Kroger loyalty cards. The coupons were automatically redeemed when consumers bought the products. Kroger is continuing the program with other manufacturers.

In the meantime, Kroger has ratcheted up sales of its own branded products that undercut the prices of P&G and other makers of consumer products—by as much as 50 percent in some cases. Kroger brand diapers, shampoo, mouthwash, paper towels, detergent, and lotions—many produced in two or even three versions at different price points—sit on Kroger shelves alongside many higher-priced P&G brands.

Similar Packaging

Some of those products are packaged in ways that clearly mimic the appearance of their P&G counterparts, which tend to be category leaders. That’s a practice P&G has been vigorously opposing—through trademark-infringement lawsuits, if necessary—with makers of other look-alike products.

P&G may be the world’s largest producer of consumer packaged goods, but Kroger’s biggest supplier is Kroger itself. More than a third of the grocery items Kroger sells are made by it or for it. It now has more than 14,000 products in its fast-growing portfolio of corporate brands. That’s up from about 8,000 as recently as 2004.

Kroger’s relationship with P&G “is strong and has grown more so in recent years as we collaborate on initiatives for customers and the community,” said Meghan Glynn, spokeswoman at Kroger’s corporate headquarters in downtown Cincinnati.

P&G officials said their latest online initiative complements, rather than conflicts with, its relationships with retailers.

“We’ve got a long-standing and strong partnership with Kroger,” said spokeswoman Tressie Long.

But Mark McGuire, president of online retailer Alice.com, said the relationship between traditional retailers and manufacturers of consumer packaged goods is tricky and getting trickier. Retailers have greatly improved their understanding of their customers through their analysis of scanner data and information culled from loyalty-card programs—think of Kroger’s joint venture with Dunnhumby—while manufacturers have increasingly been cut off from the end users of their products, relatively speaking. The fragmentation of media has also played a part, McGuire said, because branded manufacturers can no longer simply buy time on a handful of major television networks to reach the bulk of their consumers.

Add to that some more recent efforts by retailers to “rationalize” the number of products they carry, eliminating clutter and streamlining inventories. All of those things are prompting manufacturers to improve their knowledge and relationships with the people who use and buy their products, McGuire said.

“There’s much more risk for these branded manufacturers if they lose their consumers,” he said.

Wisconsin-based Alice.com was formed last year as a way for branded manufacturers to collaborate and share the costs of selling online. P&G’s products are sold by Alice, but P&G is not a direct participant in the venture. Alice acquires the P&G products it sells from a distributor, not P&G, according to P&G’s Long. While other manufacturers retain ownership of their inventories that are used to fulfill Alice.com orders, “that business model doesn’t work for us,” she said.