Freya Ingrid Morales — Bloomberg via Getty Images
By Bloomberg
August 16, 2017

As beer bottles in Russia get smaller, Carlsberg’s troubles in the country are growing.

Following a ban on 1.5-liter plastic bottles at the start of the year, local rivals began aggressively slashing prices on smaller containers to protect market share, while Carlsberg went the other route to preserve profitability. The result was on display Wednesday when the Danish brewer reported earnings: a 5% drop in the brewer’s share of that market during the first half, contributing to a slide in volume in eastern Europe.

Carlsberg shares fell as much as 3.9% in Copenhagen, the most in a year, as the brewer warned of a tougher third quarter and avoided raising its full-year profit forecast. Investors looked beyond a first half in which earnings surged past estimates on the back of bigger-than-expected cost savings.

“Today’s results confirm the challenges that Carlsberg faces are ongoing,” Eddy Hargreaves, an analyst at Investec, said in a note. The brewer’s presence in tough markets such as Russia, India and China “makes us cautious about the near-term direction of forecasts.”

Carlsberg’s Russian troubles have become a recurring theme since it placed a bet on the market with its biggest-ever acquisition in 2008. The company’s business there generated almost half of operating profit seven years ago. But a series of shocks to the market — including plunging oil prices, Western sanctions, recession and higher beer taxes — has diminished its weight in the brewer’s earnings. The Danish company sells about a third of the beer consumed in Russia under brands such as Baltika.

Prices of plastic-bottled beer in Russia are now so low that even Carlsberg, the lowest-cost producer in the region, would be unprofitable in that market, according to Liberum analysts. The brewer’s brands are usually priced a few percentage points higher than local competitors, but the difference is now as much as 30% in some regions, a situation that Carlsberg says can’t last.

“Obviously, it’s not a sustainable price gap,” Chief Executive Officer Cees ’t Hart said of the price at which Carlsberg sells its beer in Russia versus competitors. The brewer will assess the market in the second half and then review its pricing for 2018, he said in an interview.

Competition in the Russian beer market continues to heat up, as evidenced by Anheuser-Busch InBev SA’s recent plan to merge its business there and in Ukraine with that of Turkey’s Anadolu Efes. According to ’t Hart, the deal is a good thing for the market, which he sees improving as it consolidates.

Carlsberg’s first-half operating profit rose 15% as cost savings compensated for declining beer volume, particularly in eastern Europe. The quantity of beer sold in the region fell about 13% in the second quarter, compared with analyst estimates for a 4.2% drop.

The second half will see the company reinvest a higher proportion of savings into its business in addition to increased costs related to its turnaround program, Chief Financial Officer Heine Dalsgaard said on a call with analysts. Poor weather in northern Europe in the first weeks of the third quarter may also weigh on results, he said.

Carlsberg is aiming to cut the best part of 2 billion kroner of costs by the end of this year to defend against an enlarged and more profitable rival following the combination of AB InBev and SABMiller Plc.

“The cost savings are coming through; we’re driving down overhead costs and supply chain efficiencies,” Dalsgaard said.

Highlights of the first-half results:

Earnings before interest, taxes and one-time items rose 20% to 4.13 billion kroner ($652 million), beating estimates of 3.82 billion kroner Sales rose 2% on a basis that excludes currency and acquisition effects, compared with analysts projections for growth of 3.2% Debt reduced by 14% to 21.9 billion kroner Carlsberg reduced its full-year forecast for gains from currency shifts to 50 million kroner from 300 million kroner.

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