Greggs, Britain's biggest bakery chain, has overcome higher ingredient and energy costs to raise profits by 27.1 per cent in 2007 but gave warning that such pressures are likely to intensify this year.

The company, which also owns the Bakers Oven brand, produced £51.1 million in pre-tax profits for the year to December 29, driven by new stores, marketing incentives and retail price increases.

Shares in the company rose 4 per cent to £44.01 following the result.

Stripping out the impact of a one-off £2.2 million gain from property sales in 2007 and £3.5 million in restructuring charges a year earlier, the result was 11.9 per cent higher at £49 million, just ahead of analysts' expectations.

For 2007, like-for-like sales were up 5.3 per cent while total sales were up 6.4 per cent to £586 million. Its gross profit margin rose 0.3 percentage points to 62.3 per cent while selling prices increased 4.2 per cent. The dividend was up 20.7 per cent to 140p for the year.

Greggs reported "steady progress" so far this year but said that it would have to work hard to maintain its profit margins given cost increases.

Derek Netherton, Greggs chairman commented, "Like every other business in our sector, we are continuing to face substantial pressure from rises in the cost of energy and in our key ingredients, including flour, vegetable oils, and protein."

Mr Netherton said the company would "work hard to mitigate the impact of cost increases through greater efficiency and ... recovering higher costs in the market place".

Greggs said the new year had started well with a 6.2 percent rise in like-for-like sales in the 10 weeks to March 8 bolstered by longer opening hours and new menus.

Greggs said that year on year selling price inflation was currently running at about 5 per cent. This is equivalent to 3p on a sausage roll and 8p on a sandwich. While future increases were likely, it was difficult to predict how far they would rise riven the volatility in ingredient prices.

The group opened 32 net new shops in 2007 and a further 40 are planned for 2008.

Greggs has also begun the search for a successor for managing director Sir Michael Darrington, 66, who has led the company for 24 years.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts