The Fenland Foods factory in Grantham, which makes Italian ready meals for M&S, is to be mothballed but Northern hopes to sign a deal with another retailer and re-open it in 2010 once it has been modernised.

Leeds-based Northern Foods is getting tough with retailers, insisting that it will only take on contracts that make a profit.

"We are telling all our customers that we don't do business on a loss-making basis," said Northern chief executive Stefan Barden. "We are sending a clear message to other retailers that we don't give M&S preferential treatment."

He added that he sees no reason why the mothballing of Fenland should affect Northern's two other M&S sites in Sheffield and Carlisle.

"We are still in discussion with M&S about these two sites," said Mr Barden. "They are both deemed strategic sites which Fenland wasn't. Under current arrangements we have no plans to resign any more M&S business."

M&S has asked suppliers to cut prices by up to 2.5 per cent as it battles to retain market share in the cut-throat supermarket sector.

Consultation with the Fenland staff began yesterday and a final decision on job cuts is expected in August.

Employees will be offered jobs at Northern's other 21 sites and while managers are expected to take them up, shopfloor workers are unlikely to be willing to relocate to the nearest sites at Corby, Nottingham, Sheffield, Leeds, Grimsby and Hull.

Andy Worth, regional officer of the GMB union, said: "The credit crunch is now beginning to hit home. This is tragic news for the workers and their families, especially as there is very little alternative employment in the area."

The mothballing will have no effect on Northern's profits as Fenland is operating at break-even. The site made £45m in annual sales. There will be a one-off cash restructuring cost of up to £5m, although it is unlikely to be this high.

Mr Barden said he doubted Northern would find have any trouble finding another retailer to move into Fenland once it has been modernised and upgraded.

"Other retailers are looking to build sites, there isn't enough capacity. It's better to re-orientate it to another customer. We want to wipe the slate clean and start again," he said.

Analyst Andrew Saunders at Panmure Gordon said: "This reflects the decision by Northern to concentrate on factories that make proper returns. Northern has pledged to improve returns – it's one of the more dynamic businesses in the sector."

Following the sale of unprofitable businesses a year ago, Northern Foods now focuses on ready meals, sandwiches, salads, pizza, biscuits and Christmas puddings.

Trade with Asda, M&S, Morrisons, Sainsbury's and Tesco represents 76 per cent of the group's revenues.

The Fenland site was built 21 years ago specifically to supply M&S. The retailer accounts for just under a third of Northern's turnover.

A spokesman for M&S 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."

Northern's shares closed the day down 3 per cent, a fall of 3p to 85.5p.

Northern has said its annual profits should beat expectations and it is seeing no sign of a consumer slowdown.