Waitrose-owner John Lewis Partnership sees challenging UK grocery market

(Changes headline and first paragraph to give full name of company)

LONDON, Sept 11 (Reuters) - The John Lewis Partnership said it expected the food retail business to remain challenging for some time as it reported a drop in underlying first-half profit at its up-market Waitrose grocery chain.

Waitrose, which accounts for about two thirds of the group's sales, increased its grocery market share to 5 percent, but its operating profit before exceptional items fell 9.4 percent to 145.2 million pounds.

Waitrose had warned last month that investment in store openings, refurbishments and in online capacity, as well as in price cuts and promotions, required to allow it to compete in a tough UK grocery market, would affect profits this year.

"The outlook in the grocery sector remains challenging and we expect that to continue to be the case for some time. In contrast, trading conditions in the non-food sector are more positive than has been the case for several years," the group said in a statement on Thursday.

Food retailers in Britain are facing tough times as the pace of market growth slows and as consumers seek cut-price deals, buy less and often shop at local convenience stores or online.

John Lewis' department store business grew operating profit before exceptional items by 62.2 percent to 56.3 million pounds. On a group basis, first-half operating profit before exceptional items rose 8.6 percent to 176.1 million pounds helped by the profit bounce at the department stores.

The 150-year-old employee-owned group, whose worker co-ownership model has been lauded by Prime Minister David Cameron, noted that while Waitrose's profits were lower, its sales performance continued to be ahead of the market.

Sales were up 1.3 percent at Waitrose in the period. They rose 8.2 percent at the firm's department stores

The sales figures show that Waitrose is performing more strongly than the country's biggest supermarket chains - Tesco , Wal-Mart's Asda, Sainsbury's and Morrisons. They are being squeezed between up-market chains like Waitrose and Marks & Spencer (Other OTC: MAKSF - news) and discounters Aldi and Lidl.

Also on Thursday, Wm Morrison Supermarkets, Britain's No.4 grocer, reported a 51 percent fall in first-half profit. (Reporting by Sarah Young; Editing by Li-mei Hoang and Jane Merriman)