Scotmid, the co-operative group employing almost 4800 in Scotland, saw profits fall again last year as it battled intensifying competition in the convenience store market.

The Edinburgh-based retailing, property and funerals group made an operating surplus of £6 million, down from £6.5m in 2011 and £9m the previous year. Turnover edged up £1m to £428m.

But the Co-operative Group's 24% cut in its supplier rebate, a significant source of income for Scotmid, is understood to have been key in preventing a profit recovery at the 154-year-old society, Scotland's largest independent co-operative.

John Brodie, chief executive, said both food retail and the Semichem pharmacy chain had "delivered an improved bottom line - despite the pressure on the high street and customers becoming more selective".

He said the group's 190 convenience stores, half in the west of Scotland, were standing up to increased competition, with Morrisons the latest giant to enter the market after picking up outlets from Jessops and Blockbuster, and small independent stores still battling hard.

"There is no doubt it's a tough marketplace, one of the most competitive in the world, but the convenience sector is the fastest-growing part of food retailing, hence a lot of people want to get into it. It's a space we have always occupied, and it's about us continuing to innovate to deal with that competition."

Scotmid has opened its fourth "premium" format store, open 18 hours and emphasising fresh food and baking, at Clarkston in East Renfrewshire. It follows a pilot store at Warrender Park in Edinburgh which has picked up a retail industry award.

Mr Brodie said: "We are happy with the way they are performing, and the industry recognition of what we have done shows that a smallish to medium-sized business in Scotland can deliver something with a leading edge."

But he said perhaps only 20 of the 190 Scotmid stores would be suitable for conversion to the new format, while further segmentation might see other stores emphasise certain product ranges.

"Although we are a chain with a lot of stores we are not removed from them," Mr Brodie said.

The changes would be about "store feel, in-store experience and theatre", he said, which might differ from store to store depending on customer research.

The integration of the 50 former family-owned Botterills stores had helped drive last year's performance, he added.

After a weak first-half hit by the poor summer, Semichem staged a strong rally at Christmas, though five loss-making stores of its 140-strong chain were closed when leases came for renewal.

The group's seven Fragrance House stores had traded well, Mr Brodie said, but he would not comment on whether they had made a profit contribution, and no new openings are planned. "We are still evaluating them," he said.

Scotmid's funerals business turned in "very strong performance" helped by the opening of a new outlet in Edinburgh, the group said, while the property business also grew profits. Assets were down £2m at £94m, largely due to a rise in the pension deficit, but a well-timed buyout deal saw Legal & General take on Scotmid pensioners' longevity risk at the £25m cost provided in the accounts. Gearing, which ballooned to 70% prior to Mr Brodie's installation in 2005, is down to 33%.

Mr Brodie said Scotmid was still looking at acquisition opportunities in complementary sectors and had the financing headroom, but was not in a hurry. "We are obviously pretty selective about what we will go for; we have markers down with professional advisers."

He said the group would continue to invest in its "process project", aimed at streamlining its businesses and creating the capacity for long-term growth.