Problems mount overseas for Tesco as it posts first profit fall in nearly 20 years

Tesco revealed the scale of the fires burning across much of its international retail empire yesterday, as the grocery giant posted its first fall in profits for nearly 20 years.

The world's third-largest retailer gave the City hope that its £1bn turnaround plan for the UK could be working by posting a small return to growth in its UK underlying sales for the first time in six quarters.

But the group, which operates in 13 countries, posted a 17.1 per cent fall in international trading profits to £378m over the half-year to 25 August and gave a bleak update on its performance in South Korea, the US and Europe. While the UK accounts for more than 60 per cent of Tesco's sales and profits, the fall in half-year sales in more than half of the countries it operates overseas will concern investors.

This is because its international business has delivered what Tesco described as "spectacular" growth over recent years. Tesco's shares fell 8.75p to 327.95p.

The group's pre-tax profits tumbled by 11.6 per cent to £1.7bn over the half-year to 25 August – the first fall for 18 years. This decline largely reflects the grocer's £1bn UK investment programme, such as adding more than 8,000 new staff and refreshing 230 stores so far with new signage and warmer colours.

Philip Clarke, Tesco's chief executive, said he was "encouraged by our customers' initial response to the changes", which helped it to deliver a 0.1 per cent rise in UK underlying sales over the 13 weeks to 25 August.

This was a marked improvement on the 1.5 per cent decline the market leader posted in its first quarter, but left it trailing behind Sainsbury's.

However, Mr Clarke faces big challenges overseas in many countries, such as South Korea, which is its biggest market outside the UK.

Tesco said its profits would take a £100m hit from South Korea this year, following a decision by the country's government to ban Sunday trading for two weekends a month and restrict trading to between 8am and midnight on other days, which has stopped Tesco Homeplus's 24-hour trading.

Tesco Homeplus, which launched in 1999 and has more than 450 stores, saw a 6.6 per cent fall in underlying sales in its second quarter, and Mr Clarke was not hopeful of a swift reversal of the regulations by the South Korean government.

Tesco is also struggling to realise its American dream after its US chain, Fresh & Easy, sunk to another painful half-year loss of £74m. Mr Clarke maintained his target of Fresh & Easy breaking even by February 2014, but he is to tightly constrain its capital expenditure in America and scale back new store openings.

Tesco also has problems closer to home after a 27.8 per cent fall in trading profits to £171m in Europe over the half year.

Mr Clarke said the "chill winds of the eurozone crisis" had spread to countries such as Poland and Czech Republic.