Tesco.com expects to reach profitability this year. The UK operation has been an undeniable success. A major driver has been its store-based distribution model, which carries far lower upfront costs than warehouse-based systems. Tesco.com is now trying to spread outside the UK, as shown by its deal with Safeway in the US. Despite some industry skepticism, the model could well succeed on a global basis.

UK online grocer Tesco.com’s CEO John Browett has told the Sunday Telegraph newspaper he expects the operation to reach profit this year.

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The unit is expected to reach sales of $440 million in 2001, representing around 2% of the company’s turnover.

Tesco.com has been an undeniable success, and this looks set to continue in the UK. It is the clear market leader, and Datamonitor expects the UK online groceries market to grow to $9.2 billion in 2005 compared with $580 million in 2000.

Key to Tesco.com’s success in the UK has been its store-based fulfillment model. Instead of building dedicated warehouse centers, Tesco supplies its online orders by picking products from its existing stores. This has allowed the company to build its service and reach profitability with relatively little upfront investment – a major advantage given that the market is still comparatively small, with Tesco.com’s sales equivalent to the turnover of six large Tesco stores.

Given the parent company’s ambitions of building a major global retail presence, a key question now is whether the model will work internationally, particularly following Tesco’s deal with Safeway and GroceryWorks to roll out the system in the US. Since the US market is characterized by bigger stores situated further apart than in the UK, there has been some skepticism about whether the model will work.

These concerns may be overstated. The collapse of Webvan makes it clear that the market value does not justify a warehouse-based system at present. The size of stores is unlikely to make a significant difference to the cost of picking, and the increased distance to customers is a problem that handicaps any distribution model.

If the model does succeed in the US, the direct and indirect rewards for Tesco will be huge. As a result, one thing that can be said for certain is that all in the industry will be keeping a close eye on GroceryWorks’ progress.

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To view related research reports, please follow the links below:-

Grocers & Supermarkets 2001

Supermarkets & Superstores

Tesco.com – a model that works (download)