Diageo has blamed its falling British sales on the shift from the on to the off-trade, the reduction in retailer promotions and the duty stamp regime.
The drinks giant also highlighted Scotland's smoking ban and "a consumer trend to value brands" as contributing factors to a 9 per cent decline in net sales to Dec 31 2006.
Speaking at a press conference as Diageo released its interim results, European boss Andrew Morgan said the introduction of duty stamps had led to retailers ordering less stock. "Some of the trade just made the call to run down stocks until the changeover and so didn't buy extra stock at the end of last year, which affected us momentarily. But we've got past it now and are moving on," he said.
Smirnoff vodka volume sales remained flat in Europe as a result of declines in Great Britain, Diageo said.
Chief executive Paul Walsh said Guinness sales had dipped due to the hot weather, with consumers instead opting for drinks such as cider.
Sales of Smirnoff Ice decreased by 17 per cent in Europe, due to the declining British market. Walsh said: "There is no question that in Europe the RTD category is contracting and it is increasingly less relevant to the total performance of the company. We are still making money, but it is becoming progressively less important to us."
Globally, Diageo enjoyed 6 per cent growth in net sales to £4,022 million, and an 8 per cent boost in operating profit, to £1,306 million.
£100 million whisky investment
Diageo is investing £100 million in expanding its operations in Scotch whisky. The company will build a new malt distillery in northern Scotland and expand its existing grain distillery in Fife to help meet anticipated long-term demand from growing markets. Around £80 million will be spent on building and expanding the distilleries and the remaining £20 million will go towards packaging and warehousing. The work should be completed by 2009.