Marston's, the brewer and pub operator, said it expected to be hit by extra costs of £12 million in the coming financial year, heaping further pressure on the performance of its managed pub operation.

The company, which brews ales including Pedigree, Banks's and Cumberland, said that although it would be able to offset about £4 million through cost efficiences, its managed unit would have to achieve like-for-like sales growth of 3 per cent to match this year's profits.

Analysts gave warning that if the trading climate were to suffer further deterioration, the group could under pressure to cut next year's dividend to preserve cash, although it is expected to hold this year's final payout.

In a trading update covering the year to October 4, Marston's said that earnings before exceptional items would be in line with expectations despite the difficult market conditions, thanks partly to a reduced tax charge.

However, the second half had seen a decline in consumer confidence and increasing inflationary pressures, which had combined with the poor summer weather to subdue sales and squeeze margins. The main cost pressures are in the areas of staff, food, energy, duty and brewing raw materials.

It said that while group turnover had risen by 2 per cent, like-for-like sales in its managed pubs had fallen by 0.6 per cent compared to last year's growth of 4.6 per cent. Food accounted for 36 per cent of sales as customers took advantage of its value-for-money offers.

Its leased and tenanted pub division suffered a 1.7 per cent fall in like-for-like profits, with the second half down by 3 per cent. The group said it had spent £2 million supporting hard-pressed landlords through rent concessions, beer discounts and other measures.

However, its brewing business won market share, lifiting its own-brewed volumes by 5 per cent against a wider beer market down by about 10 per cent. Its premium ales benefited from the recent mini-revival of real ale drinking, lifting volumes by 17.5 per cent, partly helped by the acquisitions of the Ringwood and Wychwood breweries.

The laggard was Banks's ale, and the company is looking at ways of rejuvenating the brand in its Midlands heartland.

The group said that its balance sheet remained strong and it expected its net debt of £1.27 billion to come down as it reduced capital expenditure and continued to sell bottom-end pubs.

It said it had received agreement in principle from HM Revenue & Customs to convert to a tax-efficient real estate investment trust without having to spin off its property assets, but remained cautious about the costs and risks associated with such a move. Analysts believe conversion remains unlikely in the current climate.

Ralph Findlay, chief executive, said: "Although we remain cautious about the immediate trading outlook we believe we are relatively well positioned for the current environment, with a focus on value for money in our managed pubs; a tenanted and leased business operated with a view to sustainability and shared risk and reward; and a great range of premium cask ales.’

Analysts are predicting earnings of about 25p, down from 26p last year, with pre-tax profits falling from £98 million to about £87 million.

For the following year, KPC Peel Hunt has cut its profit forecast to just £71.6 million, although it was reassured that Marston's was "likely to remain inside debt covenants in any conceivable scenario".

Evolution Securities said that the New Year could prove "very tricky" for the pub trade, adding: "A further deterioration in trading would require a substantial dividend cut to preserve cash."

Shares of Marston's fell by almost 10 per cent in morning trading, losing 11.25p to 105.75p. They later closed down 5p at 112p, a fall of 4.3 per cent.

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