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The City: The agony of the analysts

Published:  18 January, 2007

The thing investors fear most is uncertainty. Even disastrous news is usually quantifiable and can thus be priced, but a leap into the unknown causes deep anxiety. Take licensed premises. They are about to undergo some of the biggest shake-ups in a generation, but the City is extremely cool about the probable outcomes.

The first major change is the revisions to licensing that come into force on 24 November. While the newspapers rage on about extended binge drinking, the move - designed to generate more of a caf culture' - has been given a lukewarm reception in the City. While most pubcos have applied for longer hours, not one notable analyst has upgraded profits or earnings forecasts as a result.

This is because nobody knows how much extra custom the changes will generate or whether they will just throw up extra costs. Consumer spending is under pressure, so how much will patrons have available to spend? Will they spend the same amount over a longer timescale and so erode profitability because of the extra staff and other overheads needed for the longer hours? Indeed, among stockmarket-listed companies it is possible that the reforms could even trigger listings downgrades. Most outlets outside city centres are predicting that they will keep their opening hours similar to those prevailing - except on Fridays and Saturdays or for special occasions - so the upside impact on profitability may be marginal at best.

The other great uncertainty worrying the City about the licensed trade is the potential impact of the smoking ban, which comes into effect in Scotland next spring and a year later in England and Wales. Here there is some evidence that the impact could be negative, but it is not conclusive. Recently, JD Wetherspoon said that sales at the one in 20 of its pubs in which smoking is banned have declined by 7% and that profit margins have been hit harder.

But there is a problem with extrapolating the Wetherspoon data on to the trade as a whole. Wetherspoon's smoking customers can move to the pub down the road where smoking is still permitted. When the ban becomes nationwide they will have a much more fundamental choice to make, and the evidence of the Irish experience is that smokers stay at home.

But licensees know what is coming and are laying their plans to combat potential loss of trade through extra food sales and catering for families. So the City is waiting to see what the licensing changes and smoking ban will really mean. Until the first figures appear, analysts will continue to agonise.