Carlsberg crafts recovery beyond Russia

A bartender serves a glass of Carlsberg beer at a bar in Kuala Lumpur, July 4, 2012. REUTERS/David Loh (MALAYSIA Tags: BUSINESS) - RTR35G8F©Reuters

Just outside Carlsberg’s Copenhagen headquarters there is a huge building site. Diggers and cranes are being used to prepare the way for a new district in Denmark’s capital, and the tower housing the Danish brewer’s top executives will soon be torn down. 

It is a useful visual metaphor to ponder for Cees ’t Hart, the Dutch-born, former dairy manager charged with lifting the world’s fourth-largest brewer out of a long state of panic. Chief executive since June, Mr ’t Hart this week presented his plan for reviving a brewer long seen as stagnant by investors. 

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Carlsberg offers a lesson on why betting big on a single emerging market is risky. It chose Russia, which in 2010 contributed almost half of its DKr5.4bn ($ 817m) net profit, but has been pummelled ever since by regulation and taxation. 

Today, with Russia drawing just 16 per cent of Carlsberg’s DKr4.6bn net profit, the brewer’s shares — at DKr589 — are still just below their peaks from 2007 and 2011. By contrast, Anheuser-Busch InBev, the world’s largest brewer that is soon to get even bigger with the purchase of SABMiller, has seen its shares triple in the past five years. 

It is little wonder that Mr ’t Hart, in an interview with the Financial Times, describes Carlsberg’s plight as “the glass is both half-empty and half-full”.

He suggests the “half-full” part is being ranked number one or two by sales in 22 of the countries in which it operates, deriving four-fifths of group profit from them, and even increasing its market share in some. But this concentration tells its own tale: Carlsberg is still absent from much of the world — in particular, the US, the rest of the Americas and Africa. 

Mr ’t Hart also acknowledges this “half-empty” side. “We have a footprint that is limited to some of the more difficult parts of the world, like Russia. We have not been able for the past five or six years to get the enthusiasm of investors. We have been behind some competitors in margins or return on invested capital. We had a surprise profit warning.” 

So, after eight months in the job, Mr ’t Hart, the former chief executive of FrieslandCampina, a Dutch dairy co-operative, has revealed his strategy for the next seven years. It rests on three big pushes — craft beer, Asia and big cities — as well as a big change in the company culture and an attempt to turn Russia round

To help fund this, Carlsberg announced a cost and job cutting programme last year that should deliver DKr1.5bn-DKr2bn in savings by 2018 and reduce staff numbers 15 per cent. 

Investors were initially disappointed by the lack of concrete targets; there was no specific goal for returns, only for dividend payouts and the ratio of net debt to earnings. But most analysts believe Mr ’t Hart is doing the best with what he has inherited. 

“He’s doing the right things simplifying the business model, focusing on the bits that count,” says Ian Shackleton, analyst at Nomura. 

But he worries about the pressure coming from the forthcoming AB InBev-SABMiller tie-up that will generate about half of global beer profits. “Carlsberg is potentially the biggest restructuring story in the consumer world,” Mr Shackleton says. “On the other hand, you’re in an industry where the competitive dynamic is moving against you.”

Mr ’t Hart acknowledges that an “immense competitor” is emerging. But he notes that, apart from Italy and potentially China, they are not so active in the countries where Carlsberg has a presence. 

One problem he does acknowledge is in sports sponsorship, a crucial area for brewers’ marketing through events such as the football World Cup and the Olympics. “They will always be able to outbid us,” he concedes. 

Carlsberg is potentially the biggest restructuring story in the consumer world. On the other hand, you’re in an industry where the competitive dynamic is moving against you

– Ian Shackleton, analyst at Nomura

Instead, Carlsberg is trying to focus on new sales opportunities. On the other side of the building site lies its original brewery from 1847. There, the cellars are filled with history. Some were used by resistance fighters in the second world war for shooting practice, another as a cold war military room to monitor Russian planes over part of Denmark. But now they are home to one of Carlsberg’s craft beers: Jacobsen. 

Like almost all brewers, Carlsberg is heavily pushing craft beer, due to its faster growth rates and fatter margins. “I have the most exciting job in Carlsberg,” says Paul Davies, head of craft and speciality beer.

The aim is to introduce craft beer into new countries; Jacobsen, hitherto centred on Denmark, was recently launched in Italy. 

Asia is the big growth market for Carlsberg. It represents 28 per cent of profits, up from 9 per cent five years ago, and Mr ’t Hart is keen to invest in China, India and Vietnam. But the Chinese beer market contracted last year after more than a decade of growth, and Carlsberg only broke even in India in 2015 — a profit is expected this year. “It gives us the opportunity for growth without being in Africa or South America. I don’t want to be critical of the hand I have,” says Mr ’t Hart. 

His final focus is big cities. Carlsberg is not present in 30 of the world’s biggest 50 cities, and Mr ’t Hart hints this could be a way to enter countries where the Danish brewer is not present. He notes that Shanghai alone has more residents than Carlsberg’s Nordic stronghold. 

Mr ’t Hart is also trying to shake up Carlsberg’s culture. Its new strategy was devised in conjunction with its top 60 managers and Mr ’t Hart is keen to shift the focus from a country-based organisation to one centred more around teams. He points to the head of France, 80 per cent of whose bonus used to depend on French results. Now there will be a 40-40-20 split between France, Europe, and the group. 

But Nomura’s Mr Shackleton frets that Carlsberg may be becoming too introspective just as AB InBev-SABMiller disrupts the industry. Flemming Besenbacher, Carlsberg’s chairman, quashed speculation this year that it would be the ideal bidder for Peroni in Italy and Grolsch in the Netherlands. Adds Mr Shackleton: “At a time when there are opportunities, they are so inward-focused that they can’t participate.”  

Carlsberg will be dwarfed by its new competitor. It profits are about one-tenth of a combined AB InBev-SABMiller’s. There is, perhaps, more than just a little truth in Mr ’t Hart’s remark — “tongue in cheek”, he later adds — that “they are so big; we are just a craft brewer!”.

The parts other beers can reach
 

When an industry’s two largest companies merge, that usually means bad news for the third-largest company — and, in brewing, that is Heineken, writes Scheherazade Daneshkhu.

Asked how his world will change once Anheuser-Busch InBev completes its £70bn merger with SABMiller, Jean-François van Boxmeer, Heineken’s chairman and chief executive is phlegmatic. “It will not change a lot,” he said last month, pointing to the larger brewers lack of territorial overlap. “AB InBev takes geographies where it was not present before — there is no market in which they have a synergistic deal.”

Eamonn Ferry, analyst at Exane BNP Paribas, agrees to an extent but says that in two of Heineken’s biggest markets, India and Nigeria, a merged AB InBev-SAB “will prove a formidable competitor . . . and could take market share away.” This may be why, in India, Heineken appears to have its sights on a potential takeover of United Breweries, in which it holds a stake.

In Africa, AB InBev’s strategy will be to push its own international brands, such as Corona and Budweiser. Heineken may find it tougher to compete against these than against Peroni, which was SAB’s main brand in that market, but will now be sold.

Trevor Stirling, analyst at Bernstein, says: “The nightmare scenario for Heineken would be if AB InBev were to use the profits in one of its markets to fund a price war in an important market for Heineken, such as Mexico or Nigeria. But AB InBev . . . will likely be focused on paying down debt.”

After an AB InBev-SAB merger, Heineken will face an industry leader three times its size in terms of sales, instead of almost twice as big. However, Mr van Boxmeer says: “They were already so big that it’s questionable whether getting bigger will give them substantially better purchasing conditions.”

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