Russia is yet to slap an import ban on Western beer, but the global brewers are still haemorrhaging sales in the region as political tensions show few signs of easing.
Carlsberg laid bare the apparent impact of the escalating East/West row yesterday after reporting a 6-7% fall in second quarter Russian beer volumes and a 10% collapse in Ukrainian beer consumption since the crisis erupted.
The Danish brewer’s shares swiftly fell by 3.6% after the grim earnings update.
But there is a danger of placing too much weight on the current Russian situation when looking at the fortunes of the listed brewing groups
Firstly, Carlsberg is uniquely exposed to instability in Russia as the brewer is the clear market leader with 39% of the beer market and ten breweries in the country. Moreover, according to Carlsberg’s 2013 annual report, Russia accounts for approximately 35% of the group’s entire volumes and 40% of operating profit.
The other major beer players are significantly less affected.
Heineken yesterday saw its shares leap by 8.3% after reporting a global rise in constant currency revenues, volumes and operating profits. The Dutch brewer saw volumes fall in central and Eastern Europe, but it is the number four brewer in Russia with around 12% of the market and is significantly more insulated from the regional consumption downturn.
AB InBev and SABMiller look equally able to cope with the regional fall in volumes given their dominant positions in the growing markets of Latin America and Africa respectively. ABInBev has a Russian market share of around 15% according to its annual report last year, while SABMiller is on approximately 14%.
Secondly, what has been somewhat glossed over amongst the apocalyptic Carlsberg headlines is that beer volumes in Russia had been falling for a long time before the current crisis took hold.
In the 2013 financial year, Carlsberg said that the Russian beer market was already declining at a rate of 8% year-on-year, due to a political crackdown on drinking, weak economic growth and changing consumer sentiment.
In its prediction for 2014, Carlsberg already flagged the region as “high risk”, due to tightening laws, regulations and tax rises on alcohol in Russia. The Russian beer market has fallen by as much as a quarter since 2008 as Russia has cracked down on the perceived social problem of drinking with measures such as banning the sale of beer from kiosks and the regulating the size of bottles.
Reports today suggest that Carlsberg is looking at scaling down operations in the country, potentially shutting a number of its local breweries. But such measures are likely to be temporary.
The simple fact is that brewers will not turn their back on Russia’s growing middle class as they see opportunities in consumers trading up to more premium products. In that sense, Russia is just part of the wider battle facing the brewers who are fighting for their share of those global consumers that are increasingly trading up to spirits or craft brews.
Ratings agency Fitch Ratings today noted: “Carlsberg’s latest results show the conflict in Ukraine has prolonged the downturn in the Russian brewing industry, but there remains significant opportunity for long-term growth in the market.”
Fitch argued that, while sales volumes have weakened in Russia and Ukraine, both countries still contributed to Carlsberg profit growth in the first half, thanks to price increases. It also believes there is still the potential for a significant recovery in the long term as the market adjusts to regulatory changes, given that consumption is so far below its previous peak (it is currently 59 litres a year per person, down from 80 at its peak in 2007).
This week saw the EU put its hand in its pocket to recompense farmers hit by Russia’s ban on European produce. Although the brewers will continue to suffer short-term pain in the region, there doesn’t appear need for a beer bailout quite yet.