Annual profits at Hobbycraft have halved as double-sided sticky tape, knitting wool and loom bands have emerged as a new front in the supermarket price war.

The arts and crafts retailer was forced to invest £2m in price cuts in the year to 24 February as the big supermarket chains and discounters Aldi and Lidl targeted crafters by slashing the price of felt tip pens, face painting kits and other hobby paraphernalia. Loom bands are also a key battleground with Poundland, for example, selling two packs of the colourful loops of elastic for £1.

Hobbycraft's chief executive, Catriona Marshall, said its profits were depressed by a £3m investment in a new warehouse at Burton on Trent: "Our performance in 2013/14 reflects investment in infrastructure and the final stages of the programme to put in place our new supply chain and online trading platform. We are now using this investment to grow store sales and our online presence."

The retailer, which has been owned by private equity firm Bridgepoint since 2010, said profits before financial charges fell 52% to £7m. Sales increased 9% to £129.6m. With four new stores taking the chain to just short of 80, Marshall said, sales were at "record levels" but the need to realign prices "to be more competitive in the market" had hurt its profit margins.

There is little sales data available on what is still a niche market, but analysts think the broad church of hobbyists, which includes knitters, embroiderers and model-makers, spend close to £3bn a year, with craft stores enjoying a renaissance during the recession.