Analysis – Carlsberg's Q1: Enough with the Resets

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Another set of quarterly figures for Carlsberg; another accusatory stab at the brewer for its over-reliance on Eastern Europe. It seems Carlsberg can't cut a break, and the almost constant reset to a 'new normal' in the region must be exhausting – not just for Carlsberg, but for the whole brewing industry in Eastern Europe.

Consider the evidence: In January 2010, the Russian authorities introduced a 200% leap in excise duty on beer in the country. Then, later in the same year, Russia's State Duma voted on plans to ban the sales of 5%+ abv beer from street kiosks and pavilions. Fast forward to January last year, and sales of all types of beer from kiosks were banned. This last move coincided with the outlawing of print media advertising of alcohol in the country.

In today's results announcement, Carlsberg highlighted the latest Eastern European hurdle: "The Ukrainian Government has decided to increase beer excise duties by 43% as of 1 May," the company said. "This will require a consumer price increase of approximately 5% to 6%."

Coupled with the heightened political uncertainty in Ukraine, one would expect Carlsberg to be in a state of panic over its presence in Eastern Europe (a region that generated 19% of the group's sales in Q1). One analyst certainly does: “Given its inferior economies of scale relative to its competitors,” says Philip Gorham at Mornningstar today, “we continue to believe that Carlsberg does not possess an economic moat.

“We think the firm's first-quarter results support this thesis, particularly when compared to those of wide moat competitor, Anheuser-Busch InBev … . Management lowered guidance for fiscal 2014, primarily due to currency movements, but we think deteriorating conditions in Eastern Europe should pose a greater concern for investors.”

And yet, Carlsberg isn't quite as worried.

"In Ukraine, our business has been operating with very limited disruption and we have been able to produce, sell and distribute our products across the country," the company said. "In February, we had to stop production at two breweries for a few days."

Can Carlsberg and the rest of the brewing world expect (relative) calm to return to Eastern Europe in 2014? After all the resets of recent years, the industry deserves it.

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