UK Co-Operative's move to share wealth hits profit

* First (Other OTC: FSTC - news) half underlying pretax profit falls 48 pct

* Fall reflects rewards in new membership scheme

* Remains in exclusive takeover talks with Nisa (Adds detail, CEO comment)

By James Davey

LONDON, Sept 21 (Reuters) - Britain's Co-Operative Group , the mutually-owned supermarkets to funerals group, said a move to step-up rewards for members and their local communities hit first half profit.

The country's biggest mutual group, which also operates legal services and insurance businesses, introduced the reward scheme last year to help revive its image following a near-collapse in 2013 due to a crisis at its banking operations.

It reported a 48 percent fall in underlying first-half profit that reflected the cost of the scheme as well as a small loss in its insurance business.

"We have choices that others don’t," Chief Executive Steve Murrells told reporters on Thursday.

"We’re not here for the short term at the behest of the City, we’re here for providing value for our members and sharing our wealth," he added, referring to London's financial hub.

The Co-op launched the new membership plan in September 2016 through which shoppers get 5 percent back on purchases of own brand products, while a further 1 percent goes to their communities.

In the six months to July 1, over half a million new members were recruited by the Co-op, taking active membership to 4.5 million across the United Kingdom. Some 29 million pounds was given in member rewards and 6 million to 4,000 local causes.

That, and the insurance outcome, dragged down underlying pretax profit to 14 million pounds, from 27 million in the same period last year.

Group revenues were stable at 4.6 billion pounds, while debt was 680 million pounds.

"We must strike a balance between being commercially successful and being socially responsible," said Murrells.

The Co-op nearly collapsed in 2013 after a 1.5 billion-pound funding "hole" was found in its banking operation. It has since recovered, aided by the shift in Britons' grocery shopping habits towards more frequent trips to smaller convenience stores - the mainstay of its business.

The Co-op no longer has a stake in the bank, which has restructured and recapitalised.

Murrells said the group's food and funeralcare businesses outperformed their markets.

Food like-for-like sales increased 3.5 percent, reflecting 14 consecutive quarters of growth, while funeralcare revenues were up 1.2 percent.

The Co-op is Britain's sixth largest supermarket group with a market share of 6.3 percent.

The CEO said it remained in exclusive talks over a possible offer for convenience retailer Nisa.

He cautioned, however, that inflation would continue to weigh on UK consumers' spending power and anticipated competition in the convenience sector would become fiercer.

($1 = 0.7408 pounds) (Editing by Kate Holton and Mark Potter)