Logging on to the supermarket sweep

Tesco has announced that it is to increase the number of its stores offering online shopping from 100 to nearly 300 in 2000. The company says its internet service, called Tesco Direct, currently has 250,000 users and annual sales of 125m, making it the largest online grocery retailer in the world. The second largest is US company Peapod with sales of 100m, and Tesco is very proud that it has beaten a US company to the quick.

Tesco is looking to hire 7,000 extra staff this year in line with online expansion, which will give 90% of the population access to its service. The initial capacity of each store participating in the scheme will be 2,000 online customers per week and, at present, Tesco Direct processes 4,000 online orders per day, mainly in the South East and London.

Tesco provides online fulfillment through its existing stores, which employ about 30 pickers and two drivers. According to the supermarket, its online service is profitable, benefiting from the 5 delivery fee it charges. Russell Craig, spokesperson for Tesco's, said: “Our service breaks even within two months of including a store in the Tesco Direct online scheme.”

At present, most of the online sales are incremental, neatly sidestepping worries over channel conflict. “So far, online sales are not taking away business from traditional stores. All Internet sales are included in individual store sales anyway. Generally 30% of online customers are completely new to Tesco's,” said Craig.

However, UK retail consultancy Verdict, which forecasts online grocery sales to reach 2.3bn in 2004, from 165m in 1999, believes that online sales will sooner or later reduce retail margins at physical stores. It estimates that only 6.4% of total online sales will be incremental, the remainder of which will be taken from what would otherwise have been spent in physical shops. This incremental percentage will be particularly low in categories such as grocery and clothing.

The largest UK supermarket retailer Asda, recently been bought by US chain Wal-Mart, opened two depots in Croydon and Watford in July 1999 which are exclusively dedicated to internet shoppers and serve 1m households within the M25. It hopes to open two more warehouses in Greater London this year and 11 across other parts of the UK within the next three to five years. Users currently access the online service through a CD-ROM catalogue which is updated online.

Nick Agarwal, spokesperson for Asda, said: “We will start to deliver food to customers in Central London later on this year. We have opted for warehouses because they will have no impact on in-store customer service. Besides, food is fresh because one link is eliminated.”

However, Tesco shrugs off the challenge posed by the online arrival of Asda, known for cutting prices to the bone: “There isn't a business model showing that online deliveries from warehouses can be profitable. You've got to get high numbers of customers straight away to break even,” said Craig.

Instead, the company emphasises its success in establishing an online brand and promoting customer loyalty. “We've had London covered for three years,” added Craig. “Internet customers are very loyal, prices are very low, so you cannot compete on price. To take custom away from us, you would have to offer something radically different.”

Meanwhile, Sainsbury has been quite slow in launching an online retail operation, although it has committed 30m to e-commerce. Like Asda, it is to open a picking center to service Greater London, but has so far not decided on the site and has no plans to extend coverage across the UK.

The main advantage of the store model is the fact that it does not require huge upfront investment, and capacity can gradually be increased.

Iceland was the first to launch a nationwide online service in October 1999, which is run from its stores and complements its present telephone home delivery service. Shoppers who live within a ten-mile radius of their local store can pick a two-hour delivery slot and the company claims that its fleet of 1000 vans make more than 85,000 home deliveries each week.

Iceland says most of the goods sold online are bulk low-margin goods, and Asda has confirmed this with its internet top ten of the most popular products which mainly consists of fresh fruit and vegetables. While the individual product costs are low, some of the online shopping services require a fairly substantial minimum outlay: Asda's minimum order is 50, including a 3.50 service charge; Iceland's service, which is free, requires a minimum order of 40; there is, however, no minimum order for Tesco.

Safeway has so far decided against introducing a universal online service. A year ago, it launched its Easy-Order shopping service based on PalmPilot hand-held devices, allowing users to pre-select their weekly groceries and send the order to the store by linking the device to a telephone line. Mike Winch, Safeway's IT director, defended the companies softly softly approach: “Most of our customers don't have access to the internet so we wanted to develop a remote ordering service that was simple and easy for everyone to use”.

Naturally, the Web is not the only option available to the supermarkets, especially as other platforms are expected to increase both in popularity and availability. Groceries are currently available via digital television, with Tesco offering goods through NTL's set-top box and home shopping channel, and Asda and Iceland providing a home shopping service on the Open Network. With the explosion of WAP services expected this year, all the of the supermarkets claim that online shopping services on WAP mobile phones are in the pipeline.