Carlsberg faces precarious year in Russia

Carlsberg faces precarious year in Russia

Russia's improving economy may finally stop the rot for the country's big brewers in 2012, but the industry remains fragile.

The country's beer market was supposed to have bottomed out 12 months ago, following 10% year-on-year volume declines in the two preceding years. However, it's taken the country's brewers longer than expected to recover from a deep recession in 2009 and a three-fold tax hike on beer in January 2010. 

Now, in January 2012, the turn of the year has again engendered fresh optimism. Carlsberg's CEO, Jorgen Buhl Rasmussen, told Reuters this week that the group expects to regain some market share in Russia in the year ahead. 

Will anyone believe him after the shocks of the last 12 months? Carlsberg's Baltika Breweries is the biggest brewer in Russia and a worse-than-expected performance at Baltika in the first half of 2011 forced Carlsberg to slash profits forecasts midway through the year. Its shares have still not recovered.

By any reckoning, 2012 will continue to be a tough year for brewers operating in Russia. Poor quality harvests have forced brewers to import malting barley at a higher cost, while restrictions on beer marketing are on the way and there is still the possibility that beer in PET bottles may be banned. 

SABMiller's decision to merge its Russian operations with Anadolu Efes reflects concerns that brewers in Russia will find it hard to insulate themselves from regulatory and cost challenges in the forseeable future.

That said, analyst group Sanford Bernstein doesn't see the situation becoming worse than it already is. "Although risks remain in Russia, we believe Russia has likely reached a bottom and should improve going forward," it said in a note today (4 January). "In particular, it looks as if underlying beer market volumes have stabilised."

Carlsberg has parachuted Isaac Sheps into Russia to head Baltika. Sheps is no stranger to tough beer market conditions, having most recently piloted Carlsberg in the UK. Bernstein said: "We expect the new management in Russia to be focused on addressing the share loss trend, with a possible tailwind from increased consumer confidence."

The size of that tailwind is likely to prove crucial for all brewers in Russia. The Organisation for Economic Co-operation and Development (OECD) said this week that Russia's economy remains "relatively backward" with a poor business climate and high levels of corruption. But, it forecast the country's gross domestic product to grow by 4.1% in both 2012 and 2013, mirroring growth in the last two years. 

Over the long-term, if Russia's negotiations to join the OECD prove successful, as is expected, then this may aid the country's business climate. In December last year, meanwhile, Russia acceded to the World Trade Organisation (WTO), following 18 years of intermittent talks.

In the shorter-term, however, a worsening crisis in the eurozone still has the potential to peg back Russia's economy. This would likely happen via a drop in oil prices.

The next 12 months for brewers in Russia hinge on how far improved economic conditions in the country can outweigh specific concerns, such as tougher regulation and elevated raw materials costs. Beer may benefit from the Government's price escalator for vodka. In time, though, Russia's accession to the WTO should lead to stronger competition for brewers from imported spirits and wine. 

The bottom line, then, is that 2012 looks precarious for Russia's beer market.