Shares in JD Wetherspoon plunged in early trade after the pubs group reported a drop in second-half profits as supermarket rivals derailed its cut-price alchohol stratedgy.

The group blamed increased competition and higher operating costs for the decline. Profits before exceptional items fell 4 per cent to £54.1 million in the six months to July 25. Turnover rose 8 per cent to £787.1 million.

Wetherspoon warned profits in the new financial year would also come under pressure after like-for-like sales were flat in August following gains of 1.9 per cent in the second half of last year and 4.8 per cent in the first half.

In early trade, shares in JD Wetherspoon were down 10.5p at 234p, while the FTSE 250 was up 2.6 points at 6,136.1.

Chairman Tim Martin said much of the increased competition came from supermarkets, which had held off-trade prices at the levels seen in 1997.

He said: "When Wetherspoon started business, 25 years ago, off-trade sales accounted for about 20 per cent of beer, wine and spirit consumption.

"Estimates suggest that off-sales rose to a record 40 per cent of overall sales during Euro 2004 and that present trends indicate that off-sales could rise to about 50 per cent in 2010," he added.

In July, Wetherspoon issued its second profit warning in three months, after sales suffered during Euro 2004.

Despite the profits fall, Mr Martin said he regarded the performance as a "short-term hiccup".

He added: "The bigger picture is that we have taken profits from £2 million to £54 million in the 12 years since we floated."

Wetherspoon said it would respond to the tough trading conditions with a new marketing campaign, including promotions on traditional ales. It also plans to scale back its expansion programme. The group plans to open 15 new pubs this coming year. It opened 28 new pubs in the year to 25 July, compared with 45 in the previous 12 months.

Panmure Gordon, the broker, said that Wetherspoon was losing market position. The broker noted it was cutting 2006 forecasts for Wetherspoon, arguing the group is now ex-growth and reiterated its "sell" rating on the stock.

Traders at CSFB said the pubs group's profits were below its expectations and the outlook was weak.

Bridgewell noted Wetherspoon's outlook remains tough, as the group said it planned to reduce pub openings to 10-15 this year and will introduce a competitive pricing policy. Bridgewell retained its 'underweight' recommendation on the shares.

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