CLOSE-UP: LIVE ISSUE - BRAND EXTENSIONS. Retailers line up to sell phone services. Can big brands break BT's stranglehold on fixed-line telephony?

"Buy your first-class return flights to the Moon here!" might be the exhortation greeting Tesco shoppers sometime in the not-too-distant future. At least it could be, considering the rate at which Britain's largest grocer is diversifying its interests into other commercial ventures.

Competitive pricing from rival retailers is forcing diversification throughout the sector, with cross-selling becoming the name of the game as many major players extend their brands into new areas - particularly telephony.

Earlier this month, Sainsbury's announced it had joined forces with Carphone Warehouse to launch low-cost telephony packages. Ditto the utility company Centrica, through its One.Tel subsidiary. As British Gas continues its bid to reposition itself as a complete home-services provider, agencies currently pitching for the £30 million business are being charged with helping promote the company as much more than an energy supplier, while helping it find a strategy to retain more customers.

Mark Rapley, a board account director at BMP DDB, says: "The telecoms offer from British Gas is a logical extension of its overall promise to make running your home easier."

Tesco too has also recently launched an audacious bid to seize a slice of BT's share of the fixed-line market, in a tie-up with Cable & Wireless.

And while competitors such as One.Tel have already instigated a price war with BT, a giant with the clout of a Tesco or Sainsbury's entering the fray could really shake up the market.

It's not the first time Tesco has extended its brand: there's Tesco Personal Finance and the Tesco.net internet service provider. The retailer is now looking at the telephony venture as a chance to cash in on its existing loyal customer base, as well as attract new customers through the new service.

Through its deal with Cable & Wireless, it will offer a cheaper alternative to BT on a Tesco-branded telephone bill, and also give customers the chance to acquire Tesco Clubcard loyalty points on everyday calls.

The initiative, due to launch this summer, means lock-in contracts and complex billing systems should become a thing of the past. And with 12 million people buying their groceries from the group each week, it has a significant customer base already captive.

This captive market has come to expect diversification from these types of operation. The retailers have plenty of experience in brand extensions in other areas, and had the chance to learn from their mistakes. Sainsbury's was the first supermarket to launch a bank, in 1997, with both Asda and Tesco rapidly following suit. However, a recent internal report by Sainsbury's Bank found Tesco's bank had been more efficient in using its customer data to exploit opportunities and cross-sell products. The report also found Tesco's heavy investment in advertising to promote its banking offer brought a greater awareness level than Sainbury's in-store hub and bespoke banking presence.

But why are the big retailers, whose traditional offer has nothing to do with telecoms, moving into this particular sector?

As British Gas discovered two years ago, telephony is a lucrative proposition.

Companies such as Sainsbury's and Tesco incur no infrastructure overheads by buying minutes from wholesalers and rebranding them in this way.

"It's a very profitable piece of business," Mike Teasdale, Abbott Mead Vickers BBDO's head of planning, comments. And the infrastructure of such companies also means they have a readymade mechanism to push the product to the captive audience.

Coupled with that immediate access to a loyal customer base is the strong brand name to back it.

"When it's a household brand name, trust counts for a lot more than the expertise you've got in that area," one observer explains.

The new entrants into the fixed-line telephony market are good news for UK consumers, as they will encourage downward pressure on prices and greater innovation in the sector. Any new arrival is a threat to BT's market dominance and a big brand such as Tesco with trusted brand values, a captive customer base and proven marketing nous poses a greater threat than any BT has faced so far.

BT faces unique challenges even before giants such as Tesco or Sainsbury's enter the fray. The competitive threat from specialist providers, other service providers and full-service value-added providers such as cable already exists. "The problem BT has is that big sharks get nibbled by lots of little piranhas," Teasdale says.

Still, nearly 20 years after deregulation, BT remains the dominant market player. Oftel figures show that 22 years after its privatisation, BT still controls 76.7 per cent share of the residential phone services market.

This doesn't seem likely to change in a hurry as BT continuously ramps up its marketing activity to lock in customers. This is coupled with consumer inertia, which Teasdale says has always been a great weapon in BT's marketing armoury.

But does diversifying into other markets diminish the core brand values of the retailers? Teasdale reckons it depends on how elastic the basic brand is, and into what area a brand is considering moving. "If it's a long way away from your core expertise, people are less likely to accept you," he says. But if companies can find a way of extending an offering to give a genuine difference from what's available elsewhere, or offer a better overall deal that complies with the core offering, then they should be ripe for success.

Tesco, Sainsbury's, British Gas and other fixed-line market competitors will need to compete aggressively in what they offer consumers, and their strategies will need to achieve stand-out in an already cluttered telecoms market. But it's all good news for consumers, who aren't likely to be confused by the breadth of services their local supermarket is set to offer. "People are savvier than that," Teasdale reckons. "They're pretty used to it now."