The Co-operative Group has swung into profit for the first half of the year but warned annual results would see a drop in earnings due to investment under a sweeping overhaul.

Pre-tax profits for the 26 weeks to July 4 rose to £36 million compared with a loss of £9m a year earlier.

It comes after a troubled few years for the sprawling food-to-funerals group, which saw it post a loss of £2.3 billion for 2013 after it was dragged down by the near-collapse of its banking arm.

The group said its supermarket business saw sales growth of 0.8 per cent and posted a 21 per cent rise in underlying profits to £120.4m during a period when 35 new convenience stores were opened and 1,000 new workers recruited.

It said it now expected "to overcome deflation in the marketplace to generate further like-for-like sales growth" in its food stores - despite the supermarket price war that has pulled down sales at its larger rivals.

The group said funeralcare had its busiest start to the year since 2008 with business boosted by a higher death rate, while general insurance swung into profit compared to a loss last year, thanks to a lower volume of claims.

Capital spending increased by 48 per cent to £144m as convenience stores were opened as well as 10 new funeral homes. Other investments, as well as higher pension costs, also increased spending.

The group reiterated that given these increases it did not expect to announce dividends until 2018 at the earliest.

It added: "We expect full-year profitability to reduce year-on-year, given the planned and increased levels of investment we are making in the second half of the year to support our rebuild strategy."

Chief executive Richard Pennycook said: "We've made a good start on the three-year journey to rebuild The Co-operative Group.

"These early days are about fixing the basics - putting in place new leadership teams and providing the investment to deliver the strategies for our businesses. Our customers and members are beginning to see the difference."

Mr Pennycook said group profit would probably be "pretty flat" at the end of the year though "the businesses themselves continue to turn around nicely" - with the bottom line either a little above break-even or slipping into loss.

"I think it's marginal either way," the chief executive said. "Whatever we are generating we are investing in the business, and that's over profitability or cash flow, because we are in an investment phase."

The Co-op saw a pre-tax profit of £124m for 2014 and net profit of £216m, boosted by the sales of its farms and pharmacy operations without which it would have been around break-even.

Latest half-year results showed debt falling to around £600m from £1.4bn a year ago. It is committed to keeping this below £900m but the debt is expected to rise over the rest of this year amid increased investment.

This has included a £125m investment in price at food stores, with a focus on beating rivals for value on fruit and vegetables - which is expected to weigh on profit margins.

Mr Pennycook said the grocery sector was likely to remain "very, very competitive" and that "deflation will be around for a while"

The Co-op is disposing of up to 300 food stores over a number of years as it sells larger sites to the likes of Waitrose, Asda, Aldi and Lidl while concentrating on its smaller convenience store network.

"We expect gradual market share reduction," Mr Pennycook said. "That is not something we are hung up about at all."

He said the key focus was on convenience stores. These delivered like-for-like sales growth of 3.3 per cent in the first half.

Mr Pennycook said there were no plans to enter the online grocery market despite larger rivals running web operations, saying he was "not aware of them doing it profitably".

But the group is trying to grow a business selling electrical goods online, competing with larger rivals such as AO World and Dixons Carphone.

Mr Pennycook said the Co-op was the only one offering one-hour delivery slots - saving customers from having to wait in all day after ordering products such as washing machines.

Meanwhile, profits were expected to remain depressed at the group's insurance arm, where first half revenues were down. Mr Pennycook said it would "take time ... to deliver on its full potential".

Overall group revenues fell two per cent to £4.6bn.

The Co-op has undergone a radical shake-up in its democratic structure so the board is now composed of a majority of independent directors, bringing more business experience.

The business, the UK's largest mutual owned by more than eight million members, includes the country's fifth biggest grocery retailer with nearly 2,800 stores. The group employs almost 70,000 people.