A RATTLED Tesco is set to splash around £500m on revamping its UK store network and recruiting new staff after it stunned the City with its first profit warning in twenty years.

Chief executive Philip Clarke is ready to sanction an investment of “hundreds of millions” of pounds in Britain after the supermarket yesterday posted weak Christmas trading figures. Sales at domestic stores open over a year fell 2.3 per cent excluding fuel and VAT in the six weeks to 7 January, after it failed to draw in shoppers despite mass discounting

The update sent shares in Britain’s largest retailer plunging by 16 per cent – its largest one-day fall since 1988 – with several other retailers posting poor figures on another black day for the high street.

Yesterday Clarke said he wanted to tackle Tesco’s “long-standing” problems in Britain, adding: “We’ve run too hot for too long... There is much more we can do to further improve our shopping trip for customers and we are determined to move faster.”

Analysts said the cost of the shake-up will reach about £500m, hitting the bottom line. Yesterday Tesco said it now expects only a tiny trading profit growth for 2012-13, despite analysts’ forecasts for a 10 per cent increase.

The changes will also include cutting back on openings of out-of-town hypermarkets in order to focus on faster-growing smaller stores and the internet. They are being seen as a tacit admission that years spent chasing foreign growth have hit Tesco’s core British operations, where store shelves have been short of products and customers left stuck in lengthy queues.

Britain provides about 70 per cent of Tesco’s operating profit but the chain’s share of the domestic grocery market fell in the run-up to Christmas, according to Kantar Worldpanel.

Espirito Santo analyst Caroline Gulliver said: “This is the first time that Tesco is deliberately taking profit margins lower that we can remember ... with the likely outcome a reduction in industry profitability.”

Clarke, who took over from Sir Terry Leahy 10 months ago, wants to make shopping at Tesco a more attractive experience, with extra staff and a greater emphasis on fresh food.

He has not put a figure on the cost of the revamp but with Tesco on course to deliver its fifth straight quarter of declining underlying UK sales he wants a “significant” investment alongside continued discounting.

Tesco missed out at Christmas as rivals Sainsbury, Asda and Wm Morrison fought the “Big Price Drop” with their own discounting vouchers.

Analyst Dave McCarthy at Evolution Securities said: “It is clear that Tesco had slashed wages to stores to try and preserve profits and that this… is a short term fix at the expense of future profits. Tesco’s situation is probably weaker and worse than appears from the outside... To get store standards back to where they should be, could be a £500m bill, and there is still the quality and range issues to be sorted out, plus more price reinvestment.”