Asda joins the battle for home shoppers

News Analysis: Every major UK supermarket is testing or offering home delivery. But is it profitable?

ASDA YESTERDAY announced a three-pronged attack on the home shopping market with plans to launch a grocery home delivery service, an on-line home entertainment offer and a digital television channel selling non- food lines like its George range of clothing.

The move adds further impetus to the small but growing market in home delivery services offered by large supermarkets.

Asda's rivals such as Tesco, Sainsbury's and Marks & Spencer are already testing home shopping schemes, although so far only Iceland has extended its scheme nationally.

Commenting on the new initiatives yesterday, Allan Leighton, Asda's chief executive, said: "This is research and development. We don't know how big this market will be. But these schemes will enable us to take market share in areas where we are currently under-represented."

The difference between Asda's scheme and those of its competitors is that it will be run from a central facility rather than from individual stores. Asda is setting up a warehouse and call centre in south London that will enable it to target 450,000 customers in a six-mile radius in which it has no stores. Total investment will be pounds 5m.

Asda has yet to price the service, but it is likely to be cheaper than the pounds 4 to pounds 5 fee charged by rivals. Asda says the warehouse will be able to cope with 1,000 orders per week but will break even at 500 orders at an average value of pounds 800.

Customers choose their goods from a paper catalogue and then place their order through to the call centre. They will then be given a two-hour "window" during which their shopping will be delivered.

Mr Leighton said: "We have searched the world looking at various models on home delivery and hardly anyone is making money out it. The only way is to have a dedicated centre because running them out of the back of a store just cannibalises sales."

He said the best models he had found were Peapod and ShopLink, both based in the US and run from central warehouses. Asda is strong in the Midlands and the North, but only has a 7 per cent market share within the M25. Home delivery will enable it to add sales without opening stores.

The second part of the new initiative will see Asda start selling books, CDs and videos on-line later this year, offering more than 1.2 million titles. The Internet offer will eventually also cover grocery orders.

The third part of the plan is a new Asda television channel that will be launched later this year on digital satellite TV. It will start with a dozen six-minute "programmes" devoted to Asda's Christmas ranges.

City analysts welcomed the home delivery move, which they said could give Asda a competitive advantage over its rivals. Simon Dunn, food retail analyst at Dresdner Kleinwort Benson, said: "The key differences are that they are doing it from a stand-alone warehouse, which is different to just about any other retailer in Britain, and they are doing it where they don't have any stores."

According to his research, home delivery could take 10 per cent of the UK food retail market within the next 10 years, a figure equivalent to pounds 15bn in sales.

Mr Dunn thinks there are two main reasons for the UK supermarkets starting home delivery trials. One is defensive; to ensure that if a rival enters the market they are well prepared. The other is strategic, because they feel that consumers will eventually demand this service. Mr Dunn says digital technology will make home shopping services cheaper, simpler and more efficient and be a key driver of the market.

Andrew Fowler at Morgan Stanley was more cautious, saying: "Home shopping will not take a large share of the food market at any time in the next 10 years. But it will grow and the main players are starting schemes in order to learn."

It is no coincidence that every major UK supermarket has started a home shopping trial in the last two years. Sainsbury's is now running one from 32 stores. It costs pounds 5 for home delivery and pounds 3.50 if customers come to the store themselves to collect their shopping.

Tesco Direct runs from 11 stores and costs pounds 4. Safeway is operating a simpler "Collect & Go" scheme from its Basingstoke branch, which costs pounds 2. Somerfield is running a scheme from 35 outlets and will extend it nationally later this year. Iceland has already launched a nationwide home delivery service and been rewarded with a huge leap in sales.

They are following supermarkets in the US which have been operating trials for some time. Few make money, and most have been run from within stores, which means the cost base and risk of cannibalising are higher. However, some US firms have expressed interest in signing joint ventures that could see them start operating schemes in the UK.

Clive Vaughan of Verdict, the retail consultancy, feels home delivery services will have a role to play, but will not capture the 10 per cent to 20 per cent share some have predicted. "It is not for lower-income groups, and people will still want to visit the store for their fresh foods." He said he could see a growing market for "collect and go" schemes that cover packaged food such as cereals and canned goods.

"The superstore groups are doing this because of fear. They don't want to miss out if it does turn out to be a big market and someone else has come in and taken it. But it is not the death of the supermarket. If it accounts for 5 per cent of the sector in 15 to 20 years' time I will be amazed," said Mr Vaughan.