Northern Foods, one of Britain’s biggest food suppliers, is cutting up to 730 jobs at factory supplying ready meals to Marks & Spencer after failing to agree a new contract with the retailer.

Stefan Barden, Northern Foods chief executive, said the Fenland Foods facility in Grantham would be mothballed in August and that it could be two years until the plant reopens.

While refusing to blame M&S he said the group had been unable to agree a deal with the retailer that would have generated an “adequate return”.

He said: “We are shaking hands on it, we are moving on, they are moving on. We couldn't find a business model that was profitable for us.”

The move comes just a month after Uniq, another food producer, cut 390 jobs. M&S enraged suppliers three months ago by asking them to reduce their prices by up to 2.5 per cent, depending on how much it buys from them.

The Fenland facility was built 21 years ago to specifically supply M&S. It has generated £45 million a year through the sale of predimonantly Italian-themed ready meals to M&S stores including lasagna, the retailer’s best-seller.

M&S accounts for just under a third of Northern’s total tunrover. Fenland represents 15 per cent of Northern's M&S business.

Mr Barden insisted the move would not hit profits in the current year and shares in the group firmed 1p to 88.5p.

Since taking over at Northern Foods, Mr Barden has told negotiators to take a far tougher stance with retailers. He is understood to be keen to supply more to Waitrose. Northern has also stepped up supplies to Asda.

Consultation with staff at the Fenland facility will begin soon with a final decision on job cuts expected on August 10. One source said up to 600 of the 730 staff could lose their job.

Andy Worth, regional secretary of the GMB union, said: "The credit crunch has now started to hit home. This is tragic for the workers and their families in Grantham since there is very little work in the area."

The Competition Commission last month called for the creation of an Ombudsman to arbiter pricing disputes between suppliers and the major supermarkets. An enhanced code of practice is to cover M&S for the first time.

Mr Barden said it was unlikely Northern Foods would have called in the Ombudsman this time round.

Northern will continue to supply chilled foods to M&S from two other facilities.

Mr Barden said: “I don't think it's any tougher being a supplier than it has been over the past 10, 20 or 30 years. We just felt we could do better and different things with the facility.”

However, he added: “It is very difficult for a manufacturer to change customers. It’s far easier for a customer to change.”

An M&S spokesman said: “Northern Foods decided the site was no longer economical and they decided to proceed with the closure.

“They remain an important supplier to us and we will continue to work with them.”

M&S is widely expected to announce next week that it will break with tradition by stocking branded food products such as Heinz baked beans for the first time.

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