Sainsbury's to expand non-food range in attempt to fight back against Tesco and Asda

J Sainsbury, Britain's second-largest supermarket group, is to increase its investment in non-food products in an attempt to fight back against the relentless advance of Tesco and Asda.

Sainsbury's, which faces being overtaken by Asda in the supermarket battle, has previously stated that food is its priority and that most of its stores are not big enough to stock a large assortment of non-food ranges. Yesterday, the company modified its stance: "Our customers are clear that we should be first for food but also want us to enhance our non-food offer."

Sir Peter Davis, the chief executive, said Sainsbury's would not be "dumping a load of televisions in the middle of the food offer as was happening when I arrived here," but said the investment in non-food would be increased.

The comments came as Sainsbury's reported a 11 per cent jump in its underlying pre-tax profitsat the half-year stage and said the Nectar loyalty card was now being used by a third of UK households just weeks after its launch.

The company said there were already 11 million active users of Nectar, a scheme which also includes BP, Debenhams and Barclaycard. However, the group declined to say what affect the scheme was having on sales.

Sir Peter said: "This is the fourth consecutive half year of improved underlying profits, a clear reversal after two years of decline. I think we have got some momentum."

However, he warned that Sainsbury's faced a tough challenge trying to drive sales and profits while also investing £1bn a year in the business and battling against rivals with bigger buying power. "It's a bit of a juggling act," he said.

He also admitted Sainsbury's would find it difficult to meet its 2005 target of achieving industry-leading margins of about 6 per cent compared with the current 3.8 per cent. "With hindsight I wish I hadn't been so specific with a specific time set," he conceded.

Sainsbury's achieved £90m of cost savings in the period, helped by smaller sheets of own-brand loo rolls, cheaper olive oil bottles and smaller labels on packaging.

Sir Peter said Sainsbury's had looked at buying T&S Stores, the convenience store retailer recently acquired by Tesco, "but we weren't interested". He said the company might make an acquisition to boost its 45-strong Sainsbury's Local chain or pick-up stores from the T&S deal if Tesco is forced to make disposals by the competition authorities.

In the six months to 12 October Sainsbury's reported pre-tax profits of £320m against £277m in the same period the previous year. Underlying profits rose 10.7 per cent to £342m. Like-for-like sales growth was confirmed as 2.5 per cent in the second quarter with no further update on current trading.

Sainsbury's declined to comment on its joint-venture with Boots where Boots takes over the health and beauty offer in Sainsbury's stores. There is a nine-store trial at the moment but the two groups are waiting for clearance from the Office of Fair Trading before rolling out the concept. Sainsbury's shares fell 1.5p to 291.5p.