October 4, 2016 / 9:52 AM / 10 months ago

UPDATE 1-UK's Greggs sees higher costs next year

* Faces commodity cost increases, sterling hit

* Says price rises for consumers a last resort

* Q3 underlying sales up 2.8 pct

* Shares rise up to 4.2 pct (Recasts with CEO comment, shares)

By James Davey

LONDON, Oct 4 (Reuters) - Higher ingredients prices and a weaker pound will drive up costs in 2017, British baker Greggs said on Tuesday, but it will only pass these increases on to consumers as a last resort.

The northern England-based firm sells sandwiches, sausage rolls, bakes and pastries from 1,743 shops in the UK and sees scope for operating well over 2,000.

It is over two years into a five-year plan to transform itself from a traditional bakery business to a food retailer focused on Britain's more than 6-billion-pounds ($7.7 billion) a year market for food-on-the-go and is increasing its range of healthier foods.

Chief Executive Roger Whiteside said over the last couple of years Greggs has benefited from an over supply in commodities markets of ingredients it uses, such as flour, proteins, sugar and oils, which caused prices to fall.

That cycle was now reversing as supply has tightened up, driving up prices, he added.

The situation is made worse by the fall in sterling following Britain's vote in June to leave the European Union, which makes importing goods more expensive. Sterling slid to a 31-year low versus the dollar on Tuesday.

"Food ingredients are going up in price because supply/demand conditions are changing. On top of that you've got the compounding effect of the devaluation of the pound," Whiteside told Reuters.

"We're looking to drive sales and productivity to help mitigate the impact of some of that," he said, adding the firm would do its "absolute utmost" to avoid price rises "because we're a value led retailer."

Last week Sainsbury's said it was not inevitable there would be higher grocery prices next year.

Whiteside was speaking after Greggs reported that sales at stores managed by the company and open over a year rose 2.8 percent in the 13 weeks to Oct. 1, its fiscal third quarter, while total sales increased 5.6 percent, helped by robust demand for new healthier products and its breakfast offer.

Its shares rose up to 4.2 percent.

Healthy options now account for about 10 percent of Greggs' turnover and could hit 20 percent in future.

Its salads and yoghurts supported sales growth in the period, the firm said, as did its breakfast products and special coffee offers and deals.

Greggs' expectations for the full 2016 year remain unchanged.

Prior to Tuesday's update, analysts were on average forecasting an underlying pretax profit of 76 million pounds, up from 73 million pounds in 2015. ($1 = 0.7788 pounds) (Editing by Paul Sandle and Alexandra Hudson)

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