It is a rarity in the world of e-commerce: an internet business that is profitable. But yesterday Tesco announced that its online grocery shopping business was now the biggest in the world, with annualised sales of £125m. It is poised for further expansion which should create 7,000 jobs - and is making money.

Two thousand new shoppers are signing on with Tesco Direct every week and it now has 250,000 registered users. By the end of this year, 90% of the population will have access to the service.

The implications could be enormous. If shoppers mostly stay at home, there are question marks over the future of the vast out-of-town superstores into which the supermarket chains have ploughed millions.

Equally, there is the potential for further erosion of high street retailing. A survey by the Royal Institution of Chartered Surveyors Research Foundation, to be published tomorrow, will warn that computer access and time pressures mean "the days of high street shopping could be numbered".

But there are alternative suggestions that e-shopping could mean a new role for traditional retailers, as shoppers order only commodities - tinned food and toilet rolls - for delivery, and revert to small shops for pro duce which they traditionally like to see before buying, like cheeses, charcuterie, fresh meat, fruit and vegetables.

Supermarket group Iceland, which started nationwide internet shopping last October and was overwhelmed with the response, has observed this trend. Malcolm Walke, its chairman, said its shoppers ordered mainly low-margin, bulk commodity goods - taking their custom for the more profitable purchases elsewhere.

Tesco now offers web shopping to anyone who lives within a 25-minute drive of a selected 100 stores. But by the end of this year, the online service will be available from 300 of Tesco's 640 stores and expanded to offer non-food items like books clothing, gifts, furnishings and banking services.

"We are now the biggest on-line grocery business in the world, and that is fact", said a Tesco spokesman. Its nearest rival is Peapods, a US grocery business which has 100,000 e-customers.

Tesco's approach is radically different from that of its main competitors. Its online business is based on its traditional stores. The staff manning the keyboards, trolleys and delivery vans for the stay-at-home shoppers are all store workers, although they work solely on the online service.

The system is highly automated. Orders coming in are fed through a computer which provides the least time-consuming route around the store for the pickers. The computer also calculates the best delivery route for the driver.

But Asda and Sainsbury believe that Tesco has got it wrong. They are ploughing millions into constructing huge warehouses, or picking centres, which will service net shoppers only.

Asda currently operates two, in Croydon and Watford, which can offer internet shopping to a potential one million shoppers. It will open two more depots inside the M25 by the end of this year and has plans for eleven more, nationwide, within the next three to five years.

By the summer, Asda@ Home is also going on Open, the television shopping channel available to Sky Digital subscribers, although the service will only be available to Londoners.

Sainsbury, which is investing £30m in e-commerce, is equally London-oriented, and a net laggard. Its first picking centres have yet to open, and it has no plans to open any outside the capital.

But that may be about to change. The Sainsbury strategy was devised by Dino Adriano, who was ousted last week and replaced by Sir Peter Davis, the e-wise boss of the Prudential insurance group, which revolutionised personal banking with Egg.

Mr Adriano was insistent that his was the right plan, supported by evidence from the US that store-based e-shopping was not cost-effective. He reckoned stores should not be cluttered up with internet pickers and packers.

Tesco, unsurprisingly, begs to differ. "There is no business model anywhere that proves picking centres can be profitable," said a spokesman. "By using our stores what we are doing is making the assets we already have work harder.

"We can increase our e-business three times before we start to reach capacity. The store-based model works well and we are a long way off changing it."