Tunnock's, the Lanarkshire confectioner which employs 600, has issued the first profits warning in its 117-year history, as rising costs threaten the future of one of Scotland's oldest food manufacturers.

The maker of the famous marshmallow teacakes and caramel wafers has told staff that severe rises in the cost of production over the past 12 months are taking their toll on the business.

The family-owned company has been hit by a sharp worldwide rise in raw materials, such as cocoa and glucose, but the costs of producing in Scotland have also been hiked by the spiralling costs of water, gas and electricity.

Scottish Water bills have trebled in the last two years while gas prices have risen by 66% in the last 12 months. The company says the costs are unlikely to come down in the short term.

It revealed yesterday that profits for 2006-07 crashed to 452,000, against the 1.6m reported last December for 2005-06. That in turn was 20% down from 2004-05, apparently because of a rise in wage costs.

Trade union members, who took industrial action late last year over a wage rise, are understood to have held an emergency meeting yesterday.

Boyd Tunnock, the firm's septuagenarian managing director and grandson of the founder, said last December: "Things are going along nicely at the moment, exports are going well."

But yesterday he unusually declined to add to a prepared statement, which said of the cost pressures: "While some of this can be absorbed in price rises, our high-volume products sell in a highly competitive market place. While our products are premium quality, the consumer and the supermarkets are driven by price."

One industry source commented: "They have gone for volume, volume, volume, and it is a cut-throat industry where the supermarkets hold a lot of power."

Some 80% of the Tunnock's output is understood to be bought by the major food retailers.

The statement went on: "Such rises are unsustainable in the long term for our business and as a consequence the management will be taking action to find ways of reducing costs without damaging our reputation and customer goodwill. The company's labour costs have also been rising significantly over the past five years."

Tunnock added: "Making things in Scotland is becoming increasingly difficult.

"This is the worst situation I have witnessed in my working lifetime. However, Tunnock's is not alone in this situation - many other bakery manufacturing businesses in Scotland are facing similar problems within their marketplace.

"We are heavily dependent on our raw materials to make our superior products. However, the company insists that overseas and domestic demand for its products has "never been stronger" and the business is "committed to working to ensure savings and efficiencies".

Tunnock concluded: "We believe we have the infrastructure in place to pull the company out of these difficult trading conditions and return to increased profit levels, but it will require the co-operation of everyone at Tunnock's."

A company source said it would be reasonable to assume that there could be an impact on the 600-strong workforce in due course, and that future options might include a sale of the business - which is reported to have attracted many offers in the past.

Tunnock's ships to more than 30 overseas destinations, and has been intensifying efforts to boost sales in France and Germany, and to break into new markets in Scandinavia.

Turnover last year edged ahead to 30.2m from the previous 30.1m, which was boosted by a 23% jump in export sales to 3.9m.

The managing director, who was awarded a CBE for his charity work in 2005 and is estimated to be worth 30m, continues to run the company which began life as a baker's shop and tearoom in 1890, and there has been no intimation about a successor.