UK retailer Tesco has said it is confident that efforts to improve its domestic performance will reap results, despite posting a drop in first-half UK profits earlier today (3 October).

In a trading update for the first six months of the year, Tesco said that profits in the UK were down 11.6% as the supermarket giant invested in its price and proposition in a bid to reverse declining sales trends.

After a surprise profit warning earlier this year, CEO Philip Clarke announced a GBP1bn investment programme designed to improve Tesco’s flagging fortunes in its domestic market. Improvements to Tesco’s proposition should see the retailer returning to the front foot in the medium term Clarke told reporters in London this afternoon. “It takes a long time to change the perceptions of customers that don’t shop with you,” he commented.

Over the past five months Tesco has made inroads in refreshing its store base, upping service levels by hiring more people and improving its product offering, notably in fresh food categories. During the period, Tesco gave 230 stores a facelift, hired 8,000 more full-time staff and relaunched its entry level own label brand, Everyday Value.

Clarke insisted that the group’s efforts were beginning to pay off, pointing to a 0.1% rise in underlying sales during the second quarter, which halted an 18-month sales slide.

Significantly, Clarke said that consumers have responded particularly well to Tesco’s Everyday Value relaunch, with sales of the line increasing by 10%. He said that the range appealed to “more savvy” consumers, for whom constraint on disposable incomes has become “the new norm”. Clarke added that Tesco’s Finest line had also grown sales, attracting consumers looking for an “affordable treat”.

As it looks to entice price conscious consumers in the UK, Tesco has also upped its level of promotional spending with the use of targeted couponing that utilises Club Card data. However, Clarke said downplayed the significance of discounting to Tesco’s sales performance, suggesting that gains were the result of the retailer’s renewed “focus on customers”.

While Clarke insisted that Tesco is benefiting from its significant UK investment, he added that this level of spending was unsustainable.

The company will look to keep a cap on capital expenditure by scaling back its space expansion programme, both in the UK and overseas. Tesco said that it will reduce store openings in markets like China and Central Europe and will also look to open smaller stores having "largely left the hypermarket format behind". In the US, Tesco said that it would put a hold on new store openings as it focuses on bringing the loss-making unit into the black.

Instead, growth will come from “getting more from the existing portfolio”, Clarke suggested.

In order to achieve this, Tesco is reducing the general merchandise that it carries in store and refocusing on its food and clothing lines. The company is also hoping to drive growth of its convenience and online businesses.

Clarke said that Tesco is looking at ways to increase sales through Tesco Direct as it looks to migrate general merchandise sales online. While he conceded that Tesco Direct is not yet profitable, he emphasised that losses are “only in the tens of millions” and added that Tesco’s online food business is turning a profit. As it looks to build on its online business in the UK, Tesco is also expanding its Click and Collect stores and Clarke revealed that it currently operates 90 “clicks and bricks” outlets.

Looking to the remainder of the year, Clarke said that Tesco expects to see a continued weak economy resulting in depressed consumer spending and a highly-promotional environment. While management conceded that the spectre of food price inflation could impact volumes, Clarke was quick to emphasise that inflation at Tesco is trailing the CPI average.

Tesco said that it is beginning to see rising commodity costs due to poor cereal harvests in the US and Russia feeding through. However, Clarke said that this pressure was being offset by deflation in other categories, such as orange juice.