Diageo warns over tough challenges

LONDON (Reuters) - Drinks giant Diageo (DGE.L) warned it was facing big challenges in its three large European markets of Spain, Britain and Ireland, but said its key North American business is holding up relatively well.

"Looking at Europe there are plenty of challenged areas, whereas in North America our business is by and large holding up," said Diageo's Finance Director Nick Rose in an interview after releasing annual results on Thursday.

The three markets of Spain, Britain and Ireland make up around 70 percent of Diageo's European profits, which in turn account for just over 30 percent of worldwide profits for the Smirnoff vodka and Guinness beermaker.

Rose said Spain is a "challenged" market due to softer economic growth with the scotch whisky market in decline and the rum market showing slowing growth. The only good news for the group is that it has managed to push through price rises.

In Britain and Ireland, the on-trade beer market in pubs and bars is having a very tough time due to weaker consumer demand, smoking bans in pubs and rising costs for consumers.

Rose said tough European markets and rising commodity costs will add pressure on Diageo to keep its gross margins steady in the current year to June 2009 and that is why the group has set a range for its profits growth target this year.

Diageo managed to edge its gross margins up slightly in the year to June 2008 to around 60 percent, but will see a bigger challenge to keep it at that level in the current year, he said.

Earlier, the Johnnie Walker whisky and Gordon's gin group met forecasts with an 11 percent rise in annual earnings to 60.6 pence in the year to June 2008, but cut its target for underlying operating profits growth to between 7 and 9 percent for the year to June 2009 from the 9 percent target which it matched in the year to June 2008.

(Reporting by David Jones; Editing by Mike Elliott)