Profits up at Greggs but bakery chain faces twin challenge of costs and demand

David Stoddart, food analyst at broker Fincap, said: "Greggs has a resilient business model but it looks like it will also face a challenging time in 2011. There is pressure both from soaring commodity prices and consumers under the cosh.

"The group cannot afford to be anything other than a discount brand, so on profit margins, for instance, it will be a challenge to maintain them in the face of the high commodity prices."

Greggs's operating profit margins are believed to be running at about 7.5 per cent, some way below the peak of 9 per cent in 2004. Analysts fear that amid the new austerity and rising redundancies, lower-paid customers of the group may forgo their sausage rolls and breakfast offerings at the group.

One said: "The consumer is getting a good kicking and Greggs can't really be immune from that on the high street.

"They might argue that if they lose some lower-paid customers because of the difficult climate they might be replaced by other better-paid consumers trading down from the likes of Pret A Manger."

Darren Shirley a broker at Shore Capital said in a note that Greggs had already posted "reasonably subdued" total sales growth of 2.2 per cent last year, with like-for-like sales in the third trading quarter of just 0.2 per cent.

But he said it also remained a "very challenging UK consumer and commodity backdrop" for the group, which sells pasties, pies, sandwiches and cakes to more than six million customers from 1,480 shops - about 180 of them in Scotland.

Despite the caution on prospects for 2011, there will be no shocks on profits in 2010. At its trading update in January the company said profits would be in line with market expectations.

The City consensus forecast for pre-tax profits is 51.4m, up from 48.8m in 2009. Consensus for Greggs's total dividend is for a rise to 18p from 16.6p last time, which would imply a final dividend unveiled this Wednesday of 12.5p.