Tesco posts flat UK sales as turnaround plan struggles for growth

LONDON (Reuters) - Tesco, Britain's biggest grocer that is 18 months into a recovery plan, posted flat quarterly sales in its home market on Wednesday, as 1 billion pounds of investment failed to boost its fortunes.

The country's biggest retailer and the world's third largest said sales at UK stores open over a year, excluding fuel and VAT sales tax, showed zero growth in the 13 weeks to August 24, its fiscal second quarter.

That compared to analysts' forecasts in a range of flat to down 0.5 percent and does represent an improvement on a first quarter decline of 1 percent.

First-half group trading profit fell 7.6 percent to 1.59 billion pounds in the six months to August 24 - in line with analysts' forecasts. That was hit by a particularly poor performance in Europe, where trading profit in the first half was down 68 percent.

"We are continuing to make good progress on building a better Tesco in the UK and the investments we have made in our international businesses have started to feed through into an improved trading performance in the second half," the group said.

"However, challenging economic conditions overseas, particularly in Europe, have held back consumer confidence and spending, leading to a lower level of sales than expected."

Once the envy of British retailers Tesco has been hurt by falling profits and asset write-downs, a costly retreat from U.S. and Japanese markets and revelations that horsemeat had been found in some meat products sold by it and other retailers.

In Britain it was hit hard by the economic downturn because compared to rivals it sells a higher proportion of non-food items, where consumers have cut back the most and also following years of underinvestment that resulted in it losing ground to Wal-Mart's Asda, the No. 2, and J Sainsbury, the No. 3.

Tesco is also the most affected by the growth of discounters Aldi and Lidl, according to JPMorgan Cazenove, until recently Tesco's house broker.

Though the firm has invested heavily in store upgrades, product ranges, more staff and its online offer for a British market which contributes over two-thirds of group revenue, its share of the market is still showing a year-on-year decline, monthly industry data showed last week.

The firm is also facing serious challenges in its international markets, though it has struck deals to exit its loss-making business in America and fold its unprofitable Chinese operation into a state-run company.

"The challenging retail environment in Europe has continued to affect the performance and profitability of our businesses there," Chief Executive Philip Clarke said.

"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."

(Reporting by James Davey; editing by Kate Holton)