Profits at the Co-operative Group fell by a third today after its food stores suffered amid "fierce" competition from supermarkets and its banking arm was hit by the recession.
The group, which last year admitted it was battling the toughest conditions for 40 years, said its 3,000-strong food store division was also hurt by the wet weather as people drove to supermarkets rather than walk to local shops.
Underlying sales in the division fell 1.2 per cent in the 26 weeks to June 30, while operating profits dropped 16 per cent to £119 million.
Its banking division, which has agreed to buy 632 branches from Lloyds, also felt the pain, with operating profits down 67.9 per cent to £36.9 million as it bore the brunt of the UK's double-dip recession.
With its two biggest divisions suffering, overall group profits fell 34 per cent to £174 million.
Chief executive Peter Marks, who recently announced his retirement, said: “A year ago, I warned that we were operating in the worst conditions that I have seen in more than 40 years in business.
”The results we are announcing today show the full impact of that, with the profitability of our two biggest businesses affected.“
However, the group said it was confident that sales and profit would improve in the second half as it reaps the rewards of its work to improve its offer.
The group's food business is the UK's fifth biggest grocer but has been struggling as supermarkets such Tesco and Sainsbury's have ramped up openings of convenience stores in recent years, while consumers have been shopping around for special offers.
But the Co-op said it is rolling out a new system which has improved stock availability in stores to 97.5 per cent while it is opening shops for longer, which was helping to increase customer satisfaction.
Underlying sales in its core convenience chain were up 1.4 per cent, with “very encouraging” sales in new trial stores, where like-for-like sales were up more than 12 per cent.
It is on track to open 80 new stores this year after buying 28 David Sands food stores in Scotland, and is building an “industry-leading” supply chain as it presses ahead with “the most ambitious change programme” it has ever undertaken.
Its banking business, which owns the Smile internet bank, was hit by increased bad debts from lending to corporate customers, provisions for payment protection insurance and low interest rates.
But it said the performance was “satisfactory” given the state of the economy and warned the outlook for the industry was unlikely to improve in the medium term.
However, it said its £750 million bid to buy more than 600 branches from Lloyds, including 4.8 million customers and 754 ATMs, would boost its financial strength.
Despite the overall drop in profits, the Co-op stood by plans to pump £2 billion into the business over the next three years.
Mr Marks added: “It is in times like these when our ownership model as a mutual really comes into its own.
“We have been able to continue to invest for the long-term development of all our businesses and to protect our customers even though we, like all businesses, have felt the impact of the tough headwinds of the unrelenting consumer downturn.”
Its specialist businesses put in a strong performance, with pharmacy and funerals among the highlights. The division saw underlying profits rise 19.3 per cent to £62 million on revenues up 1.5 per cent.