UK market proves to be tough for Diageo

Scotland's smoking ban, reduced retailer-funded promotions and a consumer shift from the on-trade to the off-trade hit Diageo's performance in the UK in the six months to December 31 2006.

The drinks giant said these factors, plus a price increase in July last year and a reduction in Christmas promotional activity "to protect brand equity and increase net sales per case", meant its UK liquor volumes declined 12 per cent while net sales were down nine per cent.

Guinness sales throughout Continental Europe fell seven per cent, with much of the decline being laid at the door of last summer's "exceptionally warm weather" in the UK and Ireland, as well as a consumer move away from pubs and towards supermarket buying.

Baileys volumes fell by eight per cent, with net sales down five per cent. Diageo said that limited promotional funding in the UK "maintained brand equity but negatively impacted Baileys' volume".

However the group saw an "excellent performance" in North America and International, with spirits brands benefitting from increased marketing spend.

Overall Diageo net sales rose 1.6 per cent to £4,022m against the same period last year, with volumes up 4.3 per cent.

The group said it expected organic operating growth to come in at around eight per cent for the full year.

Paul Walsh, Diageo chief executive, added that the group was on course to return £1.4bn to shareholders this year and would be looking to add a further £1bn to this figure in the 2008 financial year.