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Carlsberg Performance Trends 2015-2019 - results data

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In early-February, Carlsberg reported a 3.2% rise in its sales from 2019. Here, just-drinks picks through the brewer's performance over the past five years for the trends set to affect the company, specifically, and the global beer category, more broadly.

Cees t Hart has been Carlsbergs CEO since mid-2015

Cees 't Hart has been Carlsberg's CEO since mid-2015

Carlsberg Sales 2015-2019 - Reported

Source: Company results

Until recently, Carlsberg - like Liverpool FC, the English football club the brewer has sponsored since 1992 - was viewed as something of an under-achiever in its field. Now, with Liverpool poised to win the team's first domestic title in three decades, the Danish-headquartered brewer has become the best-performing beer stock of the past few years, outstripping rivals such as Anheuser-Busch InBev and Heineken.

The turnaround under the leadership of CEO Cees t'Hart since 2015 has been centred on a disciplined, rather than spectacular, policy of keeping costs firmly under control and the patient building of revenues, particularly in Asia.

'Funding the Journey' was the sometimes painful programme of cost efficiencies; the initiative officially ended in 2018, but its effects are still felt, in that it engendered a culture shift at the company that is still central to its business model. The more savage cuts may have ended, but expenditure is still tightly controlled.

Funding the Journey gave way to 'Sail '22', with its emphasis on brand investment, a drive into the digital arena and the exploration of new centres of growth, such as craft/speciality beer and the low/no-alcohol space.

Carlsberg remains a brewer with a clearly-defined footprint in the traditional beer markets of Western Europe - the region accounted for 55% of total sales in 2019 - and one with a strong presence in Eastern Europe, Russia in particular. The latter dates back to its carve-up of Scottish & Newcastle with Heineken in 2008, and Carlsberg taking full control of Baltic Beverages Holding (BBH) four years later. But, strength in Russia has been a drag on the company's performance amid consumption declines and government intervention in the form of tax hikes and regulatory change.

Instead, Carlsberg has had to look east to Asia for dynamic growth, culminating in a stellar 2019 that saw the region's sales surge by 12.3%, with China up 19%. As the coronavirus outbreak continues to impact consumption (in China, but increasingly elsewhere too), the big question for the company is not whether it will impact its 2020 performance, but by how much, and for how long.

Carlsberg Sales by Region 2015-2019 - Reported

Source: Company results

Carlsberg is a brewer with a historically disproportionate reliance on the mature beer markets of Western Europe. A key feature of the company's improved performance in recent years, however, has been the gradual shrinking of the region's share of overall sales - from 60% in 2016 to just over 55% in 2019.

Geographical diversity was first brought by the company's forays into Eastern Europe, in particular Russia, with the region accounting for more than one-fifth of sales as recently as 2014; that share has since drifted down to less than 17% in 2019.

Meanwhile, Asia has been the driving force behind the group's recent growth, thanks to dynamic trends in markets including China, Vietnam, Cambodia and Laos. Accounting for less than 20% of sales in 2014, the region overtook Eastern Europe in terms of revenue share the following year, reaching almost 28% in 2019 after two years of excellent growth.

The most obvious weakness lies in the company's relative absence from the Americas

The most obvious weakness - the jibe about Carlsberg not being truly global bites because it is essentially true - lies in the company's relative absence from the Americas. These are difficult markets to break into, however, without making a sizeable acquisition of a regional player, and the company is probably wary of doing such a deal for its own sake, rather than because it makes long-term business sense. As such, it may have to content itself with bolt-on acquisitions of craft and speciality brewers, and joint ventures with local operators.

Western Europe

Western Europe's broadly lacklustre trends were reflected in the performance recorded in 2019, when sales edged up by only 0.3% to DKK36.3bn (US$5.3bn) - impacted by, among other things, tough comparisons with the warm summer in 2018.

It's hard work, but in an environment where volume growth is elusive, Carlsberg continues to pursue a value-led strategy: price/mix was up 1%, and volumes fell 0.8%.

This approach is epitomised by the UK market, where the ballsy relaunch of the mainstream Carlsberg brand as Carlsberg Danish Pilsner in early-2019 - supported by the eye-catchingly self-effacing "We lost our way" confessional campaign - brought good progress in price/mix in 2019, but also a high single-digit volume decline.

This premiumisation drive will be central to the potential for future top-line growth in Western Europe, although several analysts remain convinced there is still scope for cost savings in the region.

Asia

Strong performances in both 2018 and 2019 have elevated Asia's share of Carlsberg's sales above 25%, and as high as 38% in terms of the region's share of the company's operating profits. A top-line increase of more than 12% in 2019 was nicely split between organic volume growth (+6%) and price/mix (+6%), with analysts agreeing that there is still plenty of potential for further premiumisation and volume gains in the region.

China was the spearhead, posting a 19% top-line gain on the year, with volumes rising 8% - illustrating the important premiumisation trend. Growth was also well spread, from a 7% revenue gain for the premium portfolio (Kronenbourg 1664 Blanc a standout, up 50%) to inroads being made beyond Carlsberg's western heartland. Local brands - such as Wusu and Dali - also enjoyed good years.

While China hogs the headlines, Carlsberg does good business in a number of other markets in the region. In 2019, India had a good 12 months, but the gloss was removed by deteriorating trends later in the year, thanks to excise and regulatory factors.

Laos - a diversified market in product terms, with water and soft drinks as well as beer - continued to grow, and Vietnam exhibited positive trends again. Cambodia, however, remains a work in progress following the company's assumption of full control of its Cambrew joint venture in the country.

Carlsberg admits it is having to "rebuild" the Cambrew business, strengthening processes and route-to-market. This process was hampered in late-2019, however, by a failed relaunch for the Angkor brand, with volumes falling 25% in the fourth quarter.

However, the elephant in the room in early-2020 - for China and, more broadly, for the region - is the coronavirus situation. Analysts were somewhat calmed by Carlsberg factoring this into its 2020 forecasts (insofar as this was possible so early in the outbreak) of a sales increase in the mid-single-digit region (on a global basis). The question is how accurate this forecast, and the assumptions of the virus's future impact, can be.

Assuming no long-term impact from coronavirus in China, future prospects look bright, thanks to the company successfully surfing the country's premiumisation trend in beer, plus its continuing efforts to expand geographically. The 'Big Cities' distribution rollout had targeted 20 cities by the end of 2018, expanding to 30 to 40 in 2019.

Beyond China, there are signs of cautious optimism over the anticipated privatisation of Habeco in Vietnam. Carlsberg has a 17% stake currently, but talks with the Vietnamese government (ongoing since 2016) are continuing, with the brewer indicating that the state would like to complete privatisation in 2020 if possible.

Eastern Europe

When Carlsberg fully took control of Baltic Beverages Holding in 2012, the move cemented its dominance of the beer market in Russia. However, the market had already shrunk by 20% in the previous four years, thanks to a combination of macroeconomic factors, tax rises and regulatory hurdles.

Nonetheless, Eastern Europe remained the brewer's second-largest region in sales terms until 2015, when it was overtaken by Asia. In 2019, the gap between the two was considerable (Eastern European sales of DKK16.8bn, versus Asia's DKK27.9bn).

The Russian crash necessitated some painfully severe but necessary cuts

The Russian crash necessitated some painfully severe but necessary cuts to the cost base, involving the closure of breweries and wholesale job losses. The FIFA World Cup in Russia offered some respite in 2018, but even this was colonised by tournament sponsor Anheuser-Busch InBev with its Budweiser brand.

Performance in 2019 was, if anything, below expectations, with sales slipping 0.4% and volumes falling 5.2%. There were bright spots in Ukraine (double-digit price/mix gains) and in Kazakhstan, but Russia was another story. Carlsberg admitted that margins and volumes (down fully 8%) in the country had been "disappointing" during the year, blaming a challenging competitive environment for eroding market share.

However, some analysts have remained sanguine about 2019's performance, with Laurence Whyatt at Barclays pointing out that it makes future comparatives in 2020 somewhat easier. This could provide some positivity to offset the impact of coronavirus in China.

Brand & Category Performance

Carlsberg has marquee brands on its 'core beer' roster - Tuborg and, of course, the group's namesake lager - but the company is seeing more dynamic growth coming from its local, craft/speciality and alcohol-free beers, albeit off a much smaller base. This was reflected in the company's 2019 performance, when core beer posted 3% sales growth but was easily outstripped by craft & speciality (+16%) and alcohol-free (+7%).

It was a mixed year for Tuborg and Carlsberg, with the former increasing sales by 2% thanks to growth in China, India, Serbia and the Baltics, while Carlsberg saw sales shrink by 3% as declines in the UK and India more than offset growth in Eastern Europe and Asia.

The excitement was reserved for the company's local power brands, which helped deliver the excellent performance in Asia - particularly China, Vietnam and Laos - and for its craft & speciality portfolio, where 1664 Blanc volumes leapt 29%, Somersby cider was up 14% and Grimbergen expanded by 3%, despite growth slowing in France.

Alcohol-free sales rose 7% - perhaps lower than expected, thanks to tough comparables and competition in Russia - while Western Europe was more buoyant, with 10% growth.

Given the demands of SAIL '22, one might have expected more investment or M&A activity from Carlsberg on the craft front, but 2019 was a relatively quiet year in that respect: a new London Fields brewery announced in June for the ailing 2017 acquisition; a new microbrewery for Grimbergen Abbey a month earlier, and the purchase of a minority stake in Beijing craft brewer Jing-A in March.

The Future

Carlsberg's priorities and issues to address in 2020 and beyond include:

Coronavirus - Carlsberg's 2019 growth was firmly built on the company's performance in Asia and, by extension, in China. Expectations for 2020 have already been tempered by the coronavirus outbreak. The virus may not have initially impacted Carlsberg's main area of operation in the country, but the whole country (and beyond) continues to be affected by the crisis. The impact is severe, but analysts for the moment appear content to absorb the short-term hit, highlighting the fact that spirits brands are likely to be even more severely affected than beer. At the same time, many analysts are voicing optimism that any reversals will be reversed in 2021 and beyond

Asia beyond China - That Carlsberg regards Asia as important to its future is clear from the appointment in November of Søren Brinck, former Denmark MD, as its first senior VP for the region. Top of Brinck's to-do list will be the continued transformation of the Cambrew business in Cambodia - particularly after the misfire with Angkor in 2019 = and resolving the long privatisation saga of Habeco in Vietnam. Could a deal be agreed at last in 2020?

Russian revival - Trends and trading conditions in Russia have been the big disappointment of the t'Hart reign to date, and 2019 did little to change that. Carlsberg needs to address this urgently in 2020, not least because of the need to offset the impact of coronavirus on Asian performance, and the expectation from analysts that Russia will improve this year

Big in America? - It's a given that the Americas represents a weak area for Carlsberg. The question is what, if anything, the company can do to address that. An acquisition of some scale would be needed, but are the conditions right for that, and what should the company buy? Perhaps, it's better to sit on the sidelines than make a wrong move

Craft moves - Given the emphasis in SAIL '22 on non-core activity, one might expect Carlsberg to have made greater strides in the craft/speciality segment. As noted above, however, the company has been relatively quiet to date. It operates London Fields as a joint venture with Brooklyn Brewery (which it also distributes in the UK) and has similar tie-ups with the US craft brewer in Lithuania, Sweden and Norway. Given the closeness of the two businesses, a move to acquire Brooklyn would make sense, although the situation is complicated by the presence of Kirin, which has a 24.5% stake

Managing expectations - Under t'Hart, Carlsberg has acquired a reputation for, in the words of one analyst, under-promising and over-delivering in terms of how its forecasts relate to actual results. That's never a bad quality - certainly better than the other way around - but the risk is that observers tend to factor that caution into their expectations. If the company only meets - rather than beats - those expectations in 2020, the market response will likely be rather more lukewarm. For now, most observers remain confident in Carlsberg's continued top-line and margin momentum


Expert Analysis

Carlsberg A/S - Strategy, SWOT and Corporate Finance Report

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