Enterprise Inns, the tenanted pub operator, said yesterday that its profits were under pressure from sharply declining beer volumes and the need to provide financial support to its hard-pressed tenants.

Shares of Enterprise, which owns about 7,800 pubs, fell by 46¼p, or 13 per cent, to 299½p, a level last seen in October 2004.

Ted Tuppen, the company’s chief executive, conceded that these were “testing times for the pub industry”, but he insisted that the company was well placed to ride the storm because of the quality of its pub estate and licensees and the security of its balance sheet. He said that although the first anniversary of the smoking ban had passed, making comparative performance easier, beer volumes had continued to fall. The group was doing “a bit better” than the industry decline of 10 per cent in recent months.

“Consumer confidence is low and the rising costs of food, fuel, mortgage costs and taxes have put increasing pressures on disposable income and discretionary spend,” he said.

About 600 landlords have applied for assistance under the group’s business recovery scheme. Rent concessions and beer discounts worth £3.5 million had been granted in the first half and analysts are forecasting a full-year hit of as much as £8.5 million. Mr Tuppen said that most of the money would go on extra beer discounts, although many licensees were being advised to use savings to freshen the appearance of their pubs. He admitted that the increased assistance and falling beer volumes had put some pressure on group earnings.

Some analysts have started to question the robustness of the leased business model adopted by Enterprise and Punch Taverns.

Mark Brumby, of Blue Oar Securities, suggested last week that the profit-ability of tenants could fall by as much as 90 per cent over the coming year as conditions deteriorate. Mr Tuppen has dismissed this research as flawed and said that the majority of its licensees were trading well. However, he reassured investors over the impact of property values, pointing out that the £25 million of disposals in the first half had at least matched book values. He added that an independent valuation of its estate was likely to show what he called “a modest valuation uplift”.

Enterprise said that it was confident that converting to a tax-efficient real estate trust was achievable. Mr Tuppen added: “All the technical work has been completed and we may be in a position to convert by the end of 2008.”

The Enterprise boss used the trading update to make a fresh attack on supermarkets for fuelling binge-drinking by selling cheap beer to young people. “It’s all very well putting up a sign telling them to drink 24 cans at 40p a can responsibly. It’s simply unconscionable,” he said.

For good measure

Glass half-empty:

— Beer volumes falling at almost 10 per cent
— Cost of helping distressed tenants rises to £8.5 million
— Number of tenants handing back keys doubles to 100
— Food, fuel and mortgage costs hit disposable income
— Alcohol duty and cheap supermarket beer sales

Glass half-full:

— Food sales are rising
— Majority of tenants are still trading well
— Acquisition of 51 high-quality pubs for £44 million
— Property revaluation to show “modest uplift”
— REIT conversion forecast is expected to boost earnings by 30 per cent

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