Sainsbury's occupies the middle ground – above low-cost supermarkets such as Leeds-based Asda, Bradford-based Morrisons and market leader Tesco, but below higher priced Waitrose and Marks & Spencer.

Analysts are worried that as consumers tighten their belts shoppers will ditch Sainsbury's in favour of its cheaper rivals. Indeed quarterly results from Asda on Tuesday showed strong growth for its Extra Special premium line and analysts suggested shoppers at M&S and Sainsbury's could be trading down to Asda.

Analyst Nick Bubb at brokerage Pali International cut his Sainsbury's recommendation from "buy" to "neutral".

"The results contain lots of waffle about 'making Sainsbury's great again', but it is not clear how well the business's premium positioning will stand up to the tougher consumer climate," Mr Bubb said.

Sainsbury's reported a 28 per cent increase in underlying pre-tax profits to £488m in the year to March 22, in line with expectations. Like-for-like sales rose by 3.9 per cent. The group announced plans to boost non-food sales through the launch of a new internet venture next year which will cost £15m to develop.

It will allow the group to take on rivals Tesco and Asda which already sell a variety of goods online.

Financial officer Darren Shapland said he expected analysts to cut profit forecasts by £25m as a result of the investment.

Sainsbury's chief executive Justin King, who stands to make as much as £9m from the supermarket's revived fortunes, said consumer budgets are clearly under pressure due to rising living costs and he expects the market to remain intensely competitive.

But Mr King said he believed Sainsbury's is "a much better business able to compete and grow in this challenging environment".

The shares closed the day down nearly four per cent at 374.5p.