Carlsberg Grins and Russian Bears It: ‘We probably misjudged kiosk closure impact’


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Sales of Carlsberg's key Russian beer brand Baltika 7 have been hit by street kiosk closures
Sales of Carlsberg's key Russian beer brand Baltika 7 have been hit by street kiosk closures

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Carlsberg says the Russian beer market is ‘difficult’ and admits it misjudged the impact of kiosk closures and the blow this dealt its Baltika 7 brand in particular.

The brewer released its Q3 2013 results yesterday, and revealed year-over-year declines in group net revenue (DKK 17.973bn or $3.23bn, -3.4%) and although net profit for shareholders for the quarter rose 4.2% to DKK 2.241bn, this was only due to ‘post-tax special items’ – operating profit fell 5% to DKK 3.426bn.

Quarterly beer sales volumes also fell % to 39.7m hectolitres (hl), with Asian growth not sufficient to offset declines in Western and Eastern Europe, where the latter includes Russia and Ukraine.

Describing the Eastern European beer market as ‘difficult’, Carlsberg cited Q3 volumes down 15% – mainly due to Russia, where volumes fell 7% in the first nine months of 2013 and 9% in Q3.

Carlsberg is the market leader in Russia – the brewer’s largest market with around 30% of group beer volumes and 40% of operating profit, where no other market provides more than 10%.

Kiosk closures, tax increases, wet weather…

But it now expects high single-digit volume declines in Russia for 2013 due to two main factors: closures of kiosks beloved by Russian beer drinkers and economic woes hitting them in the pocket.

All the kiosks – traditional street stalls selling beer – disappeared by the end of 2012 when beer was classified as an alcoholic drink, while Russia recently downgraded its long-term GDP forecast from 4.3% growth to 2.5%.

Noting Baltika 7’s strength as a SKU within kiosks, CEO Jørgen Buhl Rasmussen said the closures hit Carlsberg’s price mix, which reflects production, distribution and promotion costs for its portfolio.

Carlsberg raised prices due to excise duty increases, he added, while negative consumer sentiment (due to a gloomy economic outlook) meant the brewer saw a slight trading down between brands.

Rasmussen said beer prices for consumers were up 10% in 2013 across the category, and 40-50% higher compared with 2008-9, although he did not clarify whether this accounted for inflation.

When will Russia grow again?

“By the end of this we year the impact of kiosk and pavilion closures should be behind us so should not have a negative impact from next year, because they all disappear by the end of 2013,”​ Rasmussen said.

Destocking in Russia also hit Q3 volumes, and Rasmussen noted a very wet September that meant more market misery.

While Rasmussen highlighted the brewer’s higher market share in Russia – up 40bps or 0.4% to 38.7% in Q3, with growth in super premium and mainstream channels – in the past he has advised analysts not to heed quarterly shifts but take a longer-term view.

Not surprisingly, Carlsberg’s CEO was keen to talk up the positives in Russia, telling analysts that the firm expected the nation’s beer category to grow again “at some point in time”​, since the economy was growing and there was no core change in beer consumption habits.

“What per cent? I don’t know, if it’s two to five per cent or three to five, but as long as the category gets back to growth that would be a significant improvement certainly for the total Carlsberg business as well.”

Analyst insight: Too many eggs in Russian basket?

Michael Friis Jørgensen, Alm. Brand Markets, told that he didn't see Russia as a booming economy, while regulations would likely tighten again next year to potentially hamper growth.

"Today we had Anadolu EFES [which as a strategic alliance with SAB Miller] close its biggest brewery in Moscow. There is no sign of a fast recovery in that market, but clearly Carlsberg won't say that,"​ he said.

"They say it will turn but will not give you a time horizon. From my viewpoint they are not standing in front of a growth market - 2% next year is really nothing. I see the market turning back to growth, but not at a strong growth rate."

Russian pressures were priced into Calrsberg's share price, Jørgensen said, "so I'm not that worried about that"​, but he added that the Russian market collapse in 2013 was worrying.

"There's no doubt that when the Russian market was strong it was nice for them to have the eggs in that basket, but less so now,"​ he said, noting that Russia was also a volatile market, that could veer between high and low growth.

"The western European market is pretty easy - that's flat. Carlsberg is running efficiency programs and trying slowly to push people up to premium brands. It's a little bit easier to run than a volatile market like Russia."

Carlsberg has raised funds to make purchases in other growth markets, Jørgensen said. "This is probably a good long-term strategy - to dilute the Russian focus - but less funny for shareholders when it happens, as it could be expensive for them."

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