In the sort of announcement that may have restaurant owners reaching for something to ease the gloom a little, Northern Foods added its weight yesterday to the growing evidence that Britons are tightening their belts as household bills rise and are opting to eat at home.

The maker of ready meals, which supplies many of Marks & Spencer's chilled foods and sandwiches, and the owner of brands such as Goodfella's pizzas and Fox's biscuits followed Domino's Pizza last week in announcing sales increases, despite the troubles assailing other parts of the economy.

According to Stefan Barden, chief executive of Northern Foods: “We are seeing people trading down from restaurants to ready meals and getting into scratch cooking as well. Our ready-to-cook stuff is also doing well as well-off people eat out in restaurants once or twice less a month. We are seeing people going down to the bottom of the market and making changes to their budgets.”

Northern said that its total first-quarter revenues for the 13 weeks to June 28 were 7.6 per cent up on the same period last year, with underlying sales 3.5 per cent higher. Underlying revenues rose by 2.1 per cent in the chilled division, while frozen foods were up by 3.5 per cent.

Mr Barden said that Northern did not rule out further price increases for its range of ready meals and frozen pizzas because rising commodity prices and higher utility costs had added £32 million to the group's cost base this year. The average selling price of Northern's products has already increased by 5.5 per cent in the company's first quarter.

Northern Foods is in talks with supermarkets about further price rises, Mr Barden said: “Discussions are robust, but they recognise that food and energy prices are all rising. As always, they always try to squeeze us down on price.” However, he added that Northern's pricing would depend on this year's harvest in August and September and he believed that prices would be flat year-on-year because more wheat is being grown than last year.

The company is closing its Fenland factory, in Lincolnshire, which makes Italian ready meals, with the loss of up to 720 jobs, after failing to agree the terms of a new supply contract with Marks & Spencer. Mr Barden said yesterday that Northern hoped to build a new state-of-the-art Fenland plant in 2010, but that this was dependent on another large retailer buying its ready meals. The factory will close at the end of next month.

Northern Foods is also merging two of its biscuit factories, which could lead to hundreds of job losses. It is in consultation with staff at the two factories - at Batley, West Yorkshire, and Uttoxeter, Staffordshire - about which site will be chosen for the building of a new, larger factory. A decision will be announced early next year. The Batley factory employs 1,280 people and the Uttoxeter site has 950 staff.

Northern's relationship with Marks & Spencer, which is responsible for about a quarter of its sales, is a matter of concern for investors. The retailer is known to be reviewing its supplier chain and costs after its sales of food declined in the final quarter of 2007-08. The announcement in May that Fenland was to close led to demonstrations outside M&S's headquarters by Fenland workers.

Panmure Gordon analysts said that although Northern Foods was still an attractive recovery story, the weaker trading picture emerging from M&S gives concern about this year's figures.

Citigroup analysts are concerned about slowing end markets and increasing price competition. They said: “The key ready meals market is slowing, the M&S review on supplier terms is ongoing and there is further cost inflation ahead that may prove difficult to offset. Furthermore, the margin story is beginning to diminish.”

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