Tesco’s internet sales rose by 31 per cent in 2007 to £1.6bn, with profit up more than 40 per cent on the year before to £124m, boosted by improved order picking.

The supermarket now has more than one million active online customers and saw an increase in new business of 20 per cent last year, fuelled by improvements in delivery slot and product availability.

Tesco also announced that its dot com store – a small warehouse that can deliver to a local area – in Croydon is now profitable and handling orders with a value of more than £1m per week.

Unlike its rival Ocado – which delivered negative results last month, with trading losses of £7.1m – Tesco delivers most of its goods from local stores as opposed to distribution hubs.

“The breadth of the group and the strength of our business model have enabled Tesco to deliver another year of growth in challenging market conditions,” said Tesco chief executive Terry Leahy.

Service levels and availability of products have also boosted the performance of the retailer’s phone and online catalogue business Tesco Direct.

The division “comfortably exceeded” its revenue target of £150m and posted sales of almost £180m, but startup costs and operating losses were £25m, which the supermarket will aim to reduce to around £20m this year.

Tesco's financial results also highlighted “efficiency savings” of more than £350m in 2007, via a range of cross-functional projects such as energy-saving across the business, improvements in supply chain management and introduction of new checkout technology for stores.

Outsourcing of IT and administrative support has also prompted savings for the business, which now employs about 3,000 staff in India for tasks ranging from software development to management accounting and payroll.