A drive to buy produce directly from farmers and manufacturers, and in tandem with U.S. parent Wal-Mart, will underpin the competitive position of British grocer Asda as major rival Tesco cuts prices, it said on Friday.

Finance director Rob McWilliam said IPL, an Asda subsidiary focussed on sourcing goods more efficiently, had grown to provide around 1 billion pounds worth of goods for the chain from around 260 million just two years ago, and was set to continue expanding rapidly.

By buying goods like fruit and wine directly from producers and cutting out middlemen like export and import agents, IPL was able to deliver cost savings of around 10 percent for Asda, which could then be reinvested in lower prices, McWilliam said on a tour of an IPL plant near Leeds, northern England.

The potential is definitely there to extend it into more and more areas, he said, noting IPL was expanding into new fields like cut flowers and could make further savings by buying more goods with other Wal-Mart businesses.

They're very interested in what we're doing, McWilliam added, noting that Wal-Mart's chief executive and the head of its international business had both recently come to visit IPL.

Britain's grocers are conducting a high-profile battle to persuade shoppers they offer the best value for money at a time when disposable incomes are being squeezed by rising prices, muted wages growth and government austerity measures.

Tesco, Britain's biggest retailer, announced in September a 500-million-pound investment in cutting prices in a move aimed at reversing a gradual loss in market share.

McWilliam said that since then, Asda had seen a surge in interest in its price guarantee, which offers to refund customers the difference in vouchers if their shopping was not at least 10 percent cheaper than the nearest rival.

Almost 4 million customers had checked prices on Asda's price guarantee website in the past four weeks, taking the total to around 13 million since the start of the year, he said, adding he was confident that Asda had maintained, and in some cases extended, its price advantage over competitors.

We are very comfortable with the market going to a low price agenda, McWilliam said.

Earlier this week, market research data from Kantar Worldpanel showed Asda had outperformed sales growth in Britain's grocery market for the first time since early 2010.

The chain is due to report third-quarter sales figures on Tuesday.

McWilliam declined to forecast the proportion of Asda products that might be supplied by IPL in future, though he noted it still provided a relatively small percentage of the chain's approximate 10 billion pounds of sales in own-brand goods.

IPL managing director Nick Scrase said wine provided a good case study of the benefits IPL could deliver for Asda.

Until IPL started buying wine for the chain, Asda bought all of the approximate 134 million bottles of wine it sells per year through third parties in agents, he said.

Now, IPL buys directly from produces without having to pay middlemen, it benefits from economies of scale by transporting the wine in 24,000-litre bags and bottling it locally, and it can also negotiate better freight rates by buying in bulk, he said, noting IPL was now shipping company Maersk's biggest customer out of South Africa.

IPL aims to deliver 12 million pounds of cost savings in wine for Asda by 2014, he added.

(Editing by Jon Loades-Carter)