Spiralling wheat costs have hit the headlines this year. But it's not just the price of a loaf of bread that's been affected - the sweet side of the baking industry has also felt the squeeze. Biscuit flour prices have doubled from about £90 a tonne to £180 in the past year, a situation that has been exacerbated by rocketing butter costs.

Like their bread-making counterparts, biscuit and cake companies are now using the latest round of price negotiations to try and pass on these costs to the big retailers. The latter could find themselves being asked to pay as much as 15% more for products with a high proportion of butter and flour, predicts Simon Richardson, sales and marketing director at cake company Rich UK.

Fortunately, the fundamentals in both mark ets remain strong. TNS data shows the ambient cakes market rose 3.6% in value to slightly more than £1bn and biscuits were up 2.7% to £1.8bn in the 52 weeks to 15 July 2007.

Their ability to respond to key trends, chiefly healthy eating and the demand for more wholesome or natural foods, has played a key part.

For the first time, the healthier biscuit sector has overtaken the chocolate biscuit bar sector in terms of value. The sector grew 9.4% to £352m compared with a 6.5% decline in value to the chocolate biscuit bar sector. Decline in the latter sector has been blamed partly on the increased focus on health, but also on a lack of innovation in the category.

In the healthier biscuit sector there are certain brands that are faring particularly well. UBUK's low-fat Go ahead! range has leapfrogged Nutri-Grain and Snack-a-Jacks to become the number one healthier biscuit brand with year-on-year growth of 18%, for instance, according to the company.

The free-from biscuit market is also growing, says gluten-free biscuit company Nutrition Point. "Product quality and packaging design have really come on," says communications manager Michelle Shinn. "We find people looking to avoid wheat, as well as coeliacs, are buying our products."

Consumer demand for products that offer both health and indulgence has helped keep sales of everyday and everyday treat biscuits buoyant with respective growth rates of 1% and 2%, despite penetration at virtually 100%. Mark Sugden, director of customer marketing at UBUK, says the market has been helped by a combination of marketing investment, NPD and measures to address people's health concerns.

"As the largest biscuit company and with a 45% share of everyday and special everyday biscuits, it falls to us to drive the market," he says. "Over the past four years we've worked to cut saturated fats, trans fats and sodium, and this year we've spent £6.5m on raising awareness of McVitie's."

The company also launched Yog Fruit Digestives and light versions of its core range, in August.

However, though health remains a key driver, the message is shifting away from low fat, sugar or salt to natural and wholesome. "When it comes to health, consumers are interested in ingredient quality rather than low fat," says Alistair McIntosh, Taylors of Harrogate sales and marketing manager. "If you're going to treat yourself, you may as well have something with really good natural ingredients."

His view is backed by Nick Hill, category manager at Musgrave Budgens Londis. "We are seeing a move towards handmade and traditional products such as More Foods' Victoria sponges and tray bakes, with a definite move away from factory-manufactured products."

As manufacturers switch to higher-quality natural ingredients, they an also charge a higher price, of course, and over the past year this has helped drive underlying growth in both categories - though how much consumers will be prepared to pay over and above current premium prices should the rising price of raw materials be passed on to them remains to be seen.

Many suppliers have made a concerted move to increase their exposure to the premium and healthy spectrum of the market, whether in cakes or biscuits.

Burton's, for instance, has just signed a licensing deal with organic chocolate brand Green & Black's to make chocolate biscuits, flapjacks and cereal bars and has launched Edinburgh Bakery organic biscuits.

Meanwhile, Northern Foods launched Naturally Fox's biscuits last year and Taylors of Harrogate launched Yorkshire Tea marmalade cake and biscuits last month.

The key is to create the feel of a cottage industry - or better still align yourself with small suppliers that can genuinely make that claim. MBL is set to introduce a range of premium own label products called Our Kitchen, made by small suppliers "who use only the best ingredients", for instance.

The everyday sector, meanwhile, was given a welcome boost by a £2m investment by Burton's in Cadbury chocolate biscuits. "We are likely to go forward with this level of support next year," says category controller Sue Garfitt. Meanwhile, the company's Maryland cookies brand grew 22.6% last year, with brand penetration of 25.5% [Nielsen].

Another key trend in cakes in the past year has been growth in impulse formats, such as cake bars and slices, sales of which grew 17.2% and 18% respectively [TNS]. "Two years ago, if you wanted to buy a special cake you would buy something large and round. Now it's about cupcakes, slices and caramel shortcakes - products that are treats to eat now," says Martin Wiltshire, head of consumer marketing at Finsbury Food Group.

The trend for impulse formats has affected the large whole cakes sector, which is down 0.5% [TNS]. Within this, licensed cakes are also struggling with underperforming film franchises such as Shrek the Third and Pirates of the Caribbean 3.

With key trends such as health and convenience driving the overall cakes and biscuits market, innovation will be of increasing importance next year, especially for brands relying solely on their heritage.n