Slowdown and smoke ban blow for Punch

The first real signs of the effect of the smoking ban that became law in July are far from encouraging for the pub sector, which is also dealing with rising costs of everything from heating to barley. Punch, which operates more than 8000 pubs in the UK, said sales slumped 2.2% in the 20 weeks from 19 August. December was particularly bad.

Chief executive Giles Thorley said: "Trading over the last eight weeks has been more subdued in what has been widely acknowledged as a challenging period for the sector, with declining consumer confidence coinciding with the impact of the smoking ban."

The shares, already reeling from a slump that saw Punch kicked out of the FTSE 100, today fell 29p to 589p. They were at 1400p last summer. Enterprise Inns lost 12p to 380p while Mitchells & Butlers dropped 11½p to 376p.

Today's statement from Punch could put pressure on management to reconsider a £5 billion merger with M&B, which owns All Bar One. Punch was said to have approached M&B shareholders about a deal to create Britain's biggest landlord in November. The talks went flat, and Punch had to backtrack once the story leaked.

The company was still claiming today that the smoking ban will be good for the industry in the long term, making pubs more pleasant, child-friendly places. But for the moment it is looking for cost cuts as margins are squeezed.

Food now accounts for 39% of sales, confirmation that the days of the "wet" pub that could survive just by selling beer are all-but over. Analysts say that if Punch is suffering, the whole sector, including arch-rival Enterprise, must be in trouble. Punch's estate of tenanted pubs, and its Chef & Brewer-led managed houses - run directly by the company - are seen as some of the best in the industry.

Mark Brumby, an analyst at Blue Oar, said: "These numbers are very grisly, particularly as Punch's are good pubs. They mean the picture for other pub companies is bad as well."

Punch could also be asked by shareholders to find new ways to release value from its properties. Today it said it would "actively consider all opportunities", but is reluctant to pile on debt.

Thorley added: "While we remain cautious about the short-term outlook, the enduring popularity and appeal of the local community pub will continue".

Regent Inns, which owns the Jongleurs and Walkabout chains, said yesterday that it was in talks about a sale of the business. It claimed that several approaches had been made, but did not name the parties.

Regent has long been seen as one of the weaker players in the sector, with tired brands that are failing to attract enough custom. Private-equity house Alchemy Partners is said to be one of the bidders.