Has Russia become a millstone around Carlsbergs neck?

Has Russia become a millstone around Carlsberg's neck?

Okay, to call the Russian beer market a dead duck may be dramatic licence, but there can be no denying that Carlsberg's relationship with Russia's beer drinkers has taken a severe turn of late.

When Carlsberg teamed with Heineken to acquire and then carve up Scottish & Newcastle in 2008, the Danish brewer was driven by the prospect of taking sole control of its then-JV with S&N in Russia, Baltic Beverages Holding (BBH). The unit was – and still is – the runaway market leader in a country that had seen beer volumes soar year-on-year, driven in part by the Government's attempts to steer the public away from excessive consumption of spirits, notably vodka.

Once Carlsberg wrestled sole ownership of BBH, the unit continued to be a cash-cow: As recently as two years ago, the division was being credited with being the main contributor to rising sales and profits for Carlsberg as BBH's Baltika beer portfolio saw its market share increase to 41%.

Fast forward two years, however, and the money fights appear well and truly over. The Russian beer market has changed immeasurably in a very short time, and Carlsberg would appear to have been caught flat-footed. The blame for a plunge in H1 net profits and a halving of the forecast for full-year profits has been placed squarely at Russia's door.

What particularly sets the alarm bells ringing is the use of the phrase "disappointing and not expected" by CEO Jørgen Buhl Rasmussen to describe the country's beer market in the period.

Triggering the nosedive has been the broadening of the Government's ire from spirits to alcohol more generally. Early last year, a tripling of the excise tax on beer gave brewers a snapshot of the way things were going to go. Then, last month, a legal recategorisation of beer meant that the category will be subject to manifold restrictions that it was previously immune to.

Throw in a poor domestic grain harvest last year and the obligatory ForEx issues, and one can see how the cash cow got crocked.

It would appear, then, that Carlsberg – and Rasmussen especially – is getting nobbled for putting quite as much focus on one market as it has done in Russia. Conceding that the country's poor performance was “not expected” may be refreshingly honest of Rasmussen, but don't be surprised if investors use the words to beat him with in the coming months.

Meanwhile, as both BBH and Russia's beer drinkers spend the rest of 2011 acclimatising themselves to the changing beer environment, expect Carlsberg to continue looking to spread itself a little thinner. I'm thinking, Asia generally, and China specifically.