Diageo is warning that tough market conditions will make it hard for it to meet growth targets for the fiscal year. More worryingly, the spirits giant will withdraw its newly launched Captain Morgan Gold premixed drink - implying that the company's brand repackaging strategy might not work as well as hoped. And archrival Allied Domecq is starting to see the fruits of its own labours...

Diageo, the UK-based spirits group, has warned that market conditions are tough and its current financial targets for the year ending June 30 "look increasingly challenging". However, the company has not issued a profit warning and is maintaining its targets of 8-10% organic growth and double-digit growth for the fiscal year.

Diageo is also withdrawing its new product offering, Captain Morgan Gold, from the US market. The ready-mixed rum drink had a disappointing launch and has failed to attract customers. New product launches are always risky, and brand extensions such as this are seen as a way to limit the risk. Its failure in this case means that Diageo will incur a £18 million charge as a result of withdrawing it from the US.

While Diageo's revenue and profit targets can be seen as optimistic, the really damaging news is the size of the Captain Morgan Gold charge and the pension deficit which has more than doubled to £950 million. Given that one of the major reasons for buying brands such as Captain Morgan from Seagram was to increase revenues by repackaging them, it is worrying that this doesn't seem to be working. Indeed, Diageo shares have fallen 8%.

Some have interpreted Diageo's warning as bad news for the drinks industry as a whole - but Allied Domecq is proving that healthy growth is possible.

The company has seen its sales rise by 16% to £3.3 billion, with net profits of £347 million compared to £327 million last year.

The company, which owns Beefeater's gin and Ballantine's scotch, has gone down the opposite route from Diageo and Pernod Ricard - it has spent £1.8 billion to build up a world-class wine business, as well as opportunistically buying brands such as Malibu rum and Stolichnaya vodka. It looks like this less exciting strategy might be the best route to profit.

Related research: Datamonitor, "New Designer Alcoholic Drinks Strategies 2001" (DMCM0049)