British consumers are turning to cheaper pubs, restaurants and hotels as the credit crunch starts to hit their wallets.

Whitbread, the budget hotels, pubs and restaurants chain, announced a 7.1 per cent increase in like-for-like sales in the year to May 29 yesterday as two of its more upmarket rivals admitted that they were in trouble.

Premium Bars & Restaurants, which owns the Living Room and Prohibition chains, issued a profits warning and said that its sales were down 5 per cent since February. The company, which is trying to transform itself into a food-based business, blamed the economy, the property market and the smoking ban for the decline.

Food & Drink Group, which owns the Henry J. Bean's American-style bars and Jamies wine bar chains, suspended trading in its shares and said that it was trying to secure additional funding to keep the group going. It is in discussions with other parties about either a reverse takeover of another business, or an offer for Food & Drink Group.

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The leisure market has been hit by a decline in consumer spending as high petrol and food costs reduce disposable income. Restaurants also face an 8 per cent increase in food costs this year, putting pressure on their margins.

Whitbread has responded to this by introducing value deals, such as two main courses for £9 at its Brewers Fayre chain, and encouraging customers to choose chicken over beef, the cost of which has risen by 40 per cent this year. It has also raised some prices.

Much of the sales rise has been driven by the low-cost hotel chain Premier Inn, which accounts for about 70 per cent of group earnings, where like-for-like sales are up by 10.7 per cent.

Like-for-like sales at Whitbread's Costa Coffee chain increased by 6 per cent, with total sales up 28.4 per cent benefiting from aggressive expansion in Britain and overseas.

Alan Parker, Whitbread's chief executive, said that the group faced a tough time in a “challenging” consumer environment. He said that much of Premier Inn's success had been driven by business travellers cutting down on expenses. He told The Times: “If profits are down and you're having to cut back, you're not going to pay £100 for a night in a four-star hotel. Premier has definitely benefited from that.”

Bookings for summer stays at the low-cost chain are also up on last year, suggesting that more British people are choosing to holiday within the UK rather than travel abroad as air travel becomes more expensive.

Mr Parker said that Whitbread was considering acquiring more hotels this year. He dismissed talk of a £900 million asset swap between Whitbread and Mitchells & Butlers (M&B), the pub chain, which was mooted in a recent Citigroup research note. M&B, which owns All Bar One, has expressed an interest in Whitbread's pubs. Robert Tchenguiz, the property entrepreneur, has an interest in both companies. Mr Parker also said that the company would not seek low-tax Reit status, despite reportedly coming under pressure to do so from Mr Tchenguiz.

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