Outlook: Has Tesco picked the right route to the future?

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The Independent Online
IF YOU believe the Internet is the future, Tesco's claim that it will be the world's largest Internet grocery business by early next year is plainly of more than passing interest, marginal though this business is at the moment. With 100,000 customers already, rising at the rate of 2,000 per week, Tesco Direct seems to be stealing a march on rivals.

Most of us might have expected one of the American Internet grocers to have attracted a larger customer base than this. But actually, established US supermarket groups tend to confine home delivery to their regional strongholds. So do Internet start-ups like Webvan. Tesco, by contrast, plans to be nationwide in Britain by later next year, giving it, to use the jargon, an important first-mover advantage over rivals.

However, size isn't everything, especially on the Web. The robustness of the business model is also critical. Here UK supermarkets are applying quite different approaches. One of the reasons Tesco Direct is able to go national so quickly is because it has chosen to "pick" online orders from existing stores. This is plainly quite labour intensive, requiring teams of employees to do what the customer used to in wheeling trollies up and down the isles, packing and then delivering the goods. On the other hand there are few capital costs.

By contrast Sainsbury's and Asda are investing huge sums in dedicated "picking centres", this on the grounds that paying one set of people to put goods on shelves and another to take them off is a waste of money. They may have a point. According to PricewaterhouseCoopers, the cost of fulfiling a grocery order from a dedicated centre is pounds 5 per order. That rises to pounds 8 if the goods are selected from a store. The costs can be even higher if other costs are included, such as the damage to sales if online order pickers get in the way of regular customers. Picking from dedicated centres also enables a greater degree of automation, PwC says.

If this is right, Tesco might eventually be forced to change tack. It also, potentially, provides an opportunity for beleaguered rivals to leap frog the mighty market leader.