Tesco reports 7.6% profits drop in first and confirms joint venture in China

The grocer also confirmed its joint venture partnership with China Resources Enterprise, whereby it will take a 20% stake in the Chinese food retailer totalling £345m.

For the 26 weeks ending August 24, Tesco reported group trading profit of £1.6bn. Group sales were up 2% to £35.6bn.

In the UK, trading profit was up 1.5% to £1.1bn, while in Europe it was down 67.8% to £55m.

In the UK, sales were up 1.1% to £24.2bn. Like-for-likes for the first half excluding petrol and VAT were down 0.5%. In Q1 it was up 1% and in Q2 it was flat.

Sainsbury’s reported like-for-like sales excluding petrol up 2% for its Q2.

Chief executive Philip Clarke said: “Despite continuing challenges, we have made further progress on our strategic priorities. We are strengthening our UK business, working to establish multichannel leadership and pursuing disciplined international growth.

“The challenging retail environment in Europe has continued to affect the performance and profitability of our businesses there. The investments we have made to improve our offer for customers in the region are already starting to take effect and we expect a stronger second half as a result.”

In China, the combined business will have more than 3,000 stores and be the leading retailer in seven out of the eight most populous Chinese provinces. Tesco said the joint venture will secure significant cost and operational synergies and move it more quickly towards profitability in China.

In the UK, Tesco said its initial work on the transformation of general merchandise has held back like-for-likes. The move away from electronics and towards more sustainable categories will continue into next year.

Clothing has reported like-for-likes up more than 10% in the refitted stores.

Tesco said the initial response to its remodelled Extra stores in Watford, Purley and Coventry has been “very positive”, and it plans to roll out further remodels in 2014.

In Europe, like-for-likes were down 5%. Total sales were up 1.2% to £5.3bn. It said it continues to see trends of a difficult economic environment, strong competition and a consumer preference for smaller store formats.

These trends were most prevalent in Turkey where Tesco said the level of losses increased significantly year on year. It said it has focused its business on driving growth around Izmir, and is beginning to see an improvement in overall operational performance.