China Resources Enterprise posts annual loss on Tesco venture costs

* Says profitability seen volatile; reducing losses a priority

* Aims to officially launch e-commerce business in H1

* CRE to focus on opening smaller stores (Adds company statement on earnings outlook)

By Donny Kwok

HONG KONG, March 20 (Reuters) - China Resources Enterprise (HKSE: 0291.HK - news) (CRE), a retail-focused conglomerate, posted its first annual loss in more than two decades, hurt by start-up costs for a venture with Tesco Plc (Xetra: 852647 - news) that will seek to turn around the British firm's stores in China.

Government-backed CRE warned profitability would continue to be volatile, also citing increased competition from e-commerce businesses as well as the Chinese government's crackdown on extravagant purchases aimed at stamping out corruption.

After Tesco failed to make it on its own in China, CRE, agreed to a venture in which it will take on the bulk of investment costs. The conglomerate has flagged it may three to five years to turn around the business and that some of Tesco's 131 supermarkets in China may be closed.

"Looking ahead, the group's top priority in 2015 is to improve operational efficiency and reduce losses," Chairman Chen Lang said a statement.

CRE, which operates around 3,000 hypermarkets and supermarkets, posted a net loss of HK$161 million ($20.75 million) for 2014, its first annual loss since a backdoor listing in 1992. That compares with a HK$1.91 billion profit in 2013.

Revenue rose 15.3 percent to HK$168.86 billion.

The Tesco joint venture, which was formed last May, competes with the country's top hypermarket operator Sun Art Retail Group Ltd as well as Wal-Mart.

For the fourth quarter, CRE's booked a loss of HK$1.02 billion, much wider than a net loss of HK$71 million in the previous quarter and a HK$30 million loss in the same quarter a year earlier.

CRE said expansion plans will focus on smaller stores, such as supermarkets, specialist stores and convenience stores while its e-commerce business will officially be launched in the first half of 2015.

Shares (Berlin: DI6.BE - news) of CRE were down 1 percent in afternoon trade. They have fallen 8 percent so far this year, lagging a 3.3 percent gain in the benchmark Hang Seng Index.

This month, Sun Art reported a 4.8 percent rise in 2014 profit, with the joint venture between Taiwanese conglomerate Ruentex Group and French retailer Groupe Auchan SA benefiting from its expansion into lower-tier cities.

($1 = 7.7576 Hong Kong dollars) (Reporting by Donny Kwok; Editing by Edwina Gibbs)