Tesco boss Philip Clarke: '2014 will be the year of hypermarket revamps'

Clarke said the grocer will make a “huge investment” as it seeks to remodel between 60 and 75 big box Tesco Extra stores next year.

Tesco, which reported a 7.6% drop in group trading profits in its first half to £1.6bn and group sales up 2% to £35.6bn, said it has made improvements to 30% of its larger stores in the last 18 months, and average sales uplifts are running at between 3% and 5%.

In August Tesco opened three remodelled Extra stores in Watford, Purley and Coventry in a bid to make them more compelling shopping destinations, with the introduction of elements such as refreshed bakery and fresh food areas, plus its restaurant Giraffe and coffee chain Harris + Hoole in Watford.

Clarke said Watford is seeing uplifts “stronger than the others” giving it confidence to roll out remodels next year.

The remodelled Extra stores are part of Tesco’s plans to reinvigorate the UK business. In the first half, UK trading profit was up 1.5% to £1.1bn and sales up 1.1% to £24.2bn. Like-for-likes excluding petrol and VAT were down 0.5%. In the first quarter like-for-likes were up 1% but were flat in the second quarter.

Clarke said: “General merchandise is still a big drag but our new concepts are going into stores and we’re encouraged that when we make a change, we’re seeing an improvement.

“Our business in the UK is strengthening and our new ranges have been well received but there is still a lot to do.”

The grocer said it has also made progress with its multichannel strategy, and cited the launch of its Hudl tablet on Monday. Tesco sold 35,000 Hudl tablets in the first two days since launch and Clarke said stock will be short next week as a result. He added “it is a good sign in the run up to Christmas”.

Tesco’s half year performance was also dragged down by its widespread problems in Europe. Trading profit across the continent plummeted 67.8% to £55m in the period, with sales up 1.2% to £5.3bn. Like-for-likes declined by 5%.

Finance director Laurie McIlwee said Tesco is “focusing hard on Europe” but added “it should be noted that it represents less than 15% of our total sales”.

He said Europe suffered from difficult economic conditions, strong competition and shoppers preferring smaller store formats. These trends are most acute in Turkey, the grocer said, where the level of losses increased significantly year-on-year.

McIlwee said: “Turkey is a business of two halves. The part around Izmir and the Mediterranean coastline is very profitable, but we then decided to expand to the east and those stores haven’t done so well. Those stores have half the sales densities of those around Izmir.”

He added: “Those 30 or so shops in the east need to be turned around or we need to do something radical there.”

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

Clarke said it has not yet been decided whether the Tesco fascia will remain in China, but Tesco-branded products will remain in the country.