DRINKS giant Diageo is preparing a new range of flavoured alcopops as it tries to arrest declining sales of its socalled ready-to-drink beverages in its key European market.

The maker of Guinness and Baileys has seen the popularity of the tipples slide across the continent, but products such as Smirnoff Ice remain core to the business, representing around 10-per cent of net sales.

The new lines, to be released later this year, are an attempt to rejuvenate the market.

Increased regulation in countries such as Germany has not helped, with higher taxes being slapped on the drinks in an effort to deter underage drinkers. Diageo has cut back on its marketing spend on ready-to-drink brands, preferring to pour money into its spirits categories including rum, gin and vodka.

The company invested more than GBP1bn on advertising and promotional activities in the year to June 30 - around 11-per cent of sales - and plans to increase its spending in the current financial year.

Scotch whisky now represents around a third of Diageo's global profits, with Johnnie Walker positioned as the star player in the sector, growing sales volumes by 5-per cent in the period.

This year Diageo celebrates the 20th anniversary of the dram, and is sponsoring Formula One motor racing to raise consumer awareness in its target emerging markets such as China and Brazil.

Europe remains tough for Diageo, as it faces health-related legislation, a continued shift in consumers choosing to drink at home rather than in bars, and weak economic conditions.

Meanwhile North America has seen consistent growth and Diageo can claim to be number one in the world's most profitable drinks market.

Chief executive Paul Walsh said the pick-up in volumes during the current financial year should mirror the 3-per cent growth of the past 12 months, with net sales forecast to rise by 4-per cent.

Diageo said that its eight priority brands, which include Johnnie Walker whisky, Guinness, Baileys liqueur, Jose Cuervo tequila and Captain Morgan rum, were its engine for growth.

Overall, group sales climbed to GBP9bn from GBP8.9bn a year earlier, while operating profits were up 2-per cent to GBP1.94bn or 7-per cent higher after stripping out the effect of currency swings.

City analysts welcomed the results and said Diageo's pledge to double its GBP700m share buy-back programme had boosted the share price, with the stock finishing the day up 13p at 805p.

In a research note, broker Credit Suisse First Boston said:

"Given the likely size of the buy-back budget on an ongoing basis, there is potential upside to consensus earnings forecasts."

Diageo has now completed its exit from the Burger King fast food business and restructured its European operations amid the challenging trading environment.

FACT FILE

2005 2004

TURNOVER GBP9bn GBP8.9bn

PRE-TAX PROFIT GBP1.8bn GBP1.9bn

DIVIDEND 29.55p 27.6p

Full-year figures