FTSE 350 Outlook: Pubs

By contrast, 2007 was a terrible year for pubs. After five years of virtually uninterrupted share price rises, pub stocks were hammered last summer following the introduction of the smoking ban. Publicans were badly hit by the new legislation and the bad weather exacerbated poor trading, forcing pub closure in flooded areas. But the credit crunch also played a part in the de-rating as the liquidity crisis derailed planned property deals that were meant to extract cash from pub groups' real estate assets and pay chunky dividends to shareholders.

At this stage, the big question is whether or not pub shares are now oversold and can stabilise at current levels. On that score, bullish analysts argue that the initial impact of the smoking ban is likely to wear off and that worries about weaker consumer spending might have been overdone. Historically, trading has always been quite resilient during economic slowdowns as pubs remain a key element of the British social life.

However, things could be quite different in this down cycle. Last year, pubs substantially increased their food offerings, in an attempt to offset the sharp decline in drink sales. Logically, this means that - like restaurants - the sector is now far more vulnerable to a downturn if, as seems likely, stretched consumers cut back heavily on discretionary expenditure.

Bullish analysts also stress prospects for consolidation across the sector. Admittedly, this might be a far more convincing argument since the sector is still quite fragmented. But as Deutsche Bank analysts point out "the quality of businesses to be acquired will be far more important than the simple goal of achieving greater scale. This probably means that individual deals will be smaller in scale than those which have dominated the past five years."