UPDATE 4-Morrison eyes new growth avenues in tough market

* To trial convenience stores, selling online in 2011

* H1 underlying profit 410 mln pounds, vs forecast 409 mln

* H1 like-for-like sales ex-fuel/VAT up 0.9 percent

* Sees low market growth in H2; to meet its FY expectations

* Shares down 0.4 pct, underperform European retail index

(Adds more company, analyst comment, updates shares)

By Mark Potter

LONDON, Sept 9 (Reuters) - Wm Morrison Supermarkets (MRW.L), Britain's fourth-biggest grocer, will test convenience stores and selling over the internet next year as it seeks to broaden its growth avenues against a tough backdrop for consumers.

New chief executive Dalton Philips said on Thursday he expected grocery market growth to remain subdued over the next 18 months, as rising fuel prices, taxes and unemployment limit retailers' ability to pass on higher commodity prices.

"Consumers continue to be under pressure ... We expect a further period of low industry growth," he told reporters, after the group met forecasts with a 14 percent rise in first-half underlying profit to 410 million pounds ($634 million).

Morrison's has outperformed bigger rivals Tesco (TSCO.L), Asda (WMT.N) J Sainsbury (SBRY.L) in terms of sales growth for the past few years as it recovers from the botched acquisition of Safeway in 2004 and customers respond to its mix of low prices, fresh food counters and innovative promotions.

But some analysts are concerned the turnaround has played out and Morrison's lacks the diversity of its rivals, which have expanded into often faster-growing areas like non-food and online retailing, smaller stores and financial services.

Philips, who joined in March from Canadian grocer Loblaw (L.TO), said Morrison's would open three pilot convenience stores in the first half of next year, and trial selling groceries online in a limited, unspecified geographic region.

"Overall slightly unexciting, adding little to Morrison's growth story, although we like the capex-lite approach which may bring the prospect of capital returns back onto the agenda," said UBS analyst Mike Tattersall.

At 1300 GMT, Morrison's shares were down 0.7 percent at 290.5 pence, underperforming a 0.3 percent rise on the STOXX 600 European retail index .SXRP. The stock has lagged that index by 9 percent over the past year.

BUILDING ON OLD, BRINGING IN NEW

Unlike major rivals, Morrison's produces much of the food it sells and Philips said this could be a key strength as it expands into convenience stores.

"With fresh food playing an increasingly important part of the convenience offer, there may be a real fit with our business," he said on a conference call.

Verdict Research analyst Neil Saunders said Morrison's needed to move quickly, given Tesco, Asda and Sainsbury's are already expanding rapidly into the smaller stores market.

But he added it was right to move cautiously online, as it was "incredibly difficult" to make a profit in that market.

Philips said Morrison's, Britain's second-biggest fresh food manufacturer, would invest further in food production, and this would boost earnings before interest, tax, depreciation and amortisation (EBITDA) by 50 million pounds over three years.

Finance Director Richard Pennycook said the investment would total around 200 million pounds, on top of its planned three-year capital spending budget of 2.2 billion pounds.

Morrison's would also test freeing up between 5 percent and 15 percent of selling space in its stores by trimming its existing range of products to create room for more health and ethnic ranges and/or more non-food products, Philips said.

Sales at Morrison's shops open over a year, excluding petrol and VAT sales tax, rose 0.9 percent in the six months ended Aug. 1, a modest pick-up from a 0.8 percent increase in the first quarter, but towards the bottom of analysts' expectations.

Philips said he believed that still put Morrison's a "nose ahead" of rivals, which have yet to report second-quarter sales. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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Britain's retailers are struggling in an uncertain economic recovery. Home Retail (HOME.L), the country's biggest household goods group, said on Thursday full-year profit would be in the bottom half of the range of analyst expectations, while music and books chain HMV (HMV.L) reported a plunge in quarterly underlying sales. [ID:nLDE68509T] [ID:nWLA2498]

Morrison's, which runs 425 stores, estimated higher petrol prices cut the disposable income of its 11 million customers by about 240 million pounds in the first half.

But it was confident of hitting full-year profit forecasts and hiked its interim dividend 14 percent to 1.23 pence a share. (Editing by David Holmes and Erica Billingham) ($1=.6463 pounds)