THE Co-operative Group posted a 48% rise in underlying profits – despite a 2.5% drop in same-store food sales at its supermarkets.

The mutual said profits rose to £545.7m in 2010 and announced that dividend payments to its 6.5m members would increase by 55% to £77.4m.

Overall food sales were up by 4.8% to £7.5m as the group benefited from the addition of the Somerfield grocery chain – but like-for-like sales fell as it struggled to compete with supermarket rivals.

Its financial services arm, which includes Smile internet bank, reported a 24% rise in sales to £2.5bn following the acquisition of the Britannia Building Society.

The group said the outlook would remain challenging into 2012 as the economic downturn is deeper than it expected.

Asked about the possibility of the Co-op bidding for some or all of the 600 branches Lloyds Bank has been ordered to sell by the European Commission, chief executive Peter Marks said: “We are in the financial services business, so it’s not surprising that we get linked with this. We look at these things all the time.”

Mr Marks said the like-for-like decline in food sales across its supermarket chain was partly due to the disruption from its £1.6bn acquisition of Somerfield in 2009.

At one stage the group was closing 25 stores a week to convert them to the Co-operative brand, he said. Severe weather in December had also disrupted food sales.

Said Mr Marks: “Delivering to our 3,000 stores was very difficult because of their locations and if I’m honest we let down our customers.”

But he said the bigger scale of the business was allowing it to compete on price with the supermarkets – with 50% of sales now coming through items on special offer.

But he said there was “no end in sight” to rampant inflation that is pushing up food prices across the sector.

Total sales at the group, which also includes funeral services and a pharmacy business, rose by 9% to £13.7bn. The dividend to employees will rise by 37% to £41m.