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Wetherspoon profits drop 11 per cent as costs and taxes rise

JD Wetherspoon's profits dropped by 11 per cent in the first half and the company is warning of imminent price rises as Britain's pubs struggle with rising commodity costs and "a pernicious combination" of increasing taxes and regulations.

Although the group's revenues rose by 7.6 per cent to £525m, and operating profits were up 1.4 per cent to £50m, pre-tax profits fell from £36m to £32m. Operating margins were squeezed from 10 per cent to 9.4 per cent.

The biggest hit came from higher interest charges, adding around £10m a year to the cost of the 787-strong chain's debts, according to Tim Martin, the Wetherspoon chairman.

But finance costs are just one of a slew of rising costs for Britain's beleaguered pubs, hit by the "pernicious combination" of excise duties, the VAT hike, the smoking ban and changing licensing arrangements, he said.

"Almost everyone and everything is charging more these days," Mr Martin said. "More than 40 per cent of sales go in taxes of one type or another, and that's a heck of a lot of money."

With the cost of commodities from oil to cocoa rising sharply as global economic momentum picks up, prices across Britain's pubs and restaurants are set to rise as much as 5 per cent in the coming months, Mr Martin said.

The pub industry is begging for a break from the annual inflation-plus-2-per-cent rise in excise duty in the Budget to be delivered by the Chancellor of the Exchequer, George Osborne, later this month.

"If taxes go up by the same amount again this year, it will be a 7 per cent rise, on top of all the other cost pressures," Mr Martin said. "It is crazy, especially when we already have the highest excise duty in Europe."

Wetherspoon already pays £10 in tax for every £1 of profit, with each of its pubs paying out £10,000 to the Government every week and around £500,000 each year. "It feels like pushing a boulder up a hill forever," Mr Martin said. "What the Government needs to realise is that it will simply get less money in the end if it keeps whacking taxes up like this."

Despite the tricky economic climate, JD Wetherspoon is still growing its operations. The company added 12 net new pubs in the first six months of the year, and expects to continue to expand in the second half. Over the year as a whole the company expects to open around 50 new pubs. Free cash flow stood at £22.7m – up from £21.3m in the same period of 2010 – after capital investment of £16.6m in existing pubs and £2.9m of share purchases.

But the outlook for the industry as a whole is more sombre. "Unless the Government eases off on pubs and gives the industry a few years to recuperate, there will be even more closures and more villages and suburbs without their own pub," Mr Martin said.

JD Wetherspoon shares closed up nearly 2 per cent at 438p.