Profits at Diageo Ireland, the owner of Guinness, Smirnoff and Baileys, have fallen by 4 per cent as pub sales continue to slide.

The company blames changing social patterns for the drift from pubs to off-licences and to drinking at home. It said the Government's smoking ban was also having an impact, although it was too early to be definitive on the effects.

The company's sales rose from £953 million (€1.4 billion) to £961 million in the year to the end of June 2004, but operating profit before exceptional items fell from £131 million to £126 million - a 4 per cent drop. The company's volumes were also down by 4 per cent.

The company said the results reflected "the continued decline of the beverage alcohol market", with overall consumption down 1 per cent in the year to the end of June 2004. The company said the major shift to the off-trade was troubling, because most of Diageo's sales were pub-based.

Volumes for Guinness were down 6 per cent in the period, while net sales were down 3 per cent.

In relation to Smirnoff, volumes were down by 4 per cent, while net sales were down by 11 per cent.

Volume for Baileys was down 12 per cent, with net sales slipping by 11 per cent.

In relation to the smoking ban, Diageo Ireland's finance director, Mr Charles Coase, said it was hard to assess the full implications as the ban only started in late March.

Pub sales were down 6 per cent last year.

"We do think it [the smoking ban\] will have an adverse effect however," Mr Coase said.

"It will have a pretty significant impact on the industry. The decline in pub sales could become a double-digit one. It could grow by a few more percentage points."

However, he emphasised that publicans were investing in their properties, in outdoor areas and in food service as a way to keep customers.

The spirits market in Ireland continued to decline, Diageo said, mainly because of the continued impact of the duty increase of more than 40 per cent in December 2002.

"However, Smirnoff increased its share of the vodka category by three percentage points," the company said.

"Volume in the local priority lager brands - Budweiser, Carlsberg and Harp - was down 3 per cent, again affected by the on-trade to off-trade switch. Smithwicks volume also declined," according to the company.

Mr Coase said about 150 pubs in Dublin were no longer serving Carlsberg, mainly in protest against price increases by Diageo.

He said "dialogue" was continuing with the pubs and he hoped a solution was possible.

Mr Coase said the company recognised there was a danger that price increases could drive pub sales down further but companies such as Diageo needed to generate a commercial return.

The parent Diageo group reported profits in line with expectations but it said improving sales in Europe remained its biggest challenge.

Diageo unveiled pre-tax profits before one-off costs of £2.07 billion for the year to June 30th, down from £2.19 billion last year.

Adverse exchange rate movements reduced this year's figure by £97 million.