Carlsberg struggles on numerous fronts

Probably ... Carlsberg has a problem

Carlsberg, soon to become the third largest brewer in the world, struggles on numerous fronts. Overall global sales were down 2% in the first six month 2016. Western Europe showed a 2% volume decline (-7% in Q1/16) which also resulted in a market share decline.  Carlsberg U.K. lost 31% sales in four weeks after the largest British supermarket chain Tesco delisted the beer. According to recent Nielsen data Carlsberg also lost 7% sales in Italy and 4% in France in the four weeks to 16 July in an otherwise growing market of 9% or 4% respectively. This is more than a sobering balance for new Senior Vice President Western Europe Michiel Herkemij who started his job in April and had previously served as Interim CEO of the Groups' business in the UK where he was known as „the cleaner“.

As one of the main sponsors of UEFA EM 2016, the European football tournament held in France from 10 June to 10 July 2016, Carlsberg hoped for a push in sales but achieved the contrary. During UEFA EM 2016 one could see banners citing the word „Probably“ but without a brand name. The reason for this mystery, which left many consumers puzzled, was not a clever marketing trick but "Loi Evin", a French law named after former French minister of Social Affairs Claude Evin, which prohibits promotion of alcoholic beverages in French stadiums. Not naming Carlsberg was one problem but using „Probably“ was another one. Carlsberg dropped its wellknown slogan „Probably the best beer in the world“ in 2011 and replaced it by “That calls for a Carlsberg”. Seemingly this did not work as well as hoped, which made Carlsberg return to „Probably“ again. But consumers do not like changes and might not have remembered the old campaign. Critics say that in view of this restrictions Carlsberg paid far too much for sponsoring the UEFA EM 2016. The current sales results could be a prove for this.

But Carlsberg does not only have to fight in Western Europe. Eastern Europe kept being a challenging environment with flat organic beer volumes as well. Russia, one of Carlsberg’s most import markets in the world, saw another volume decline of 2%in the first half year 2016. The Ukraine experienced a sales drop of 6%due to an excise duty increase of 100 percent as per 1 January.

Asia and especially China was also not a source of pleasure. Organic volume in Asia decreased by 3%. As part of a restructuring plan Carlsberg closed 11 breweries in China.

Carlsberg also got rid of another source of trouble when it sold its sole operation in Africa this month. Carlsberg Malawi was the first Carlsberg brewery outside of Denmark and started operations in 1968. The South-East African company is accused of polluting local Mudi River for many years. The river is source of potable water for several local villages. Carlsberg showed remorse and promised to build a sewage treatment plant which will be operational in 2017. In order to avoid negative press and to streamline operations Carlsberg now decided to divest of the African brewery. New owner, French Castel Goup, is privately owned and is not as much exposed to the public as publicly listed Carlsberg A/S. Furthermore Castle runs several operations across Africa and can benefit from synergies in the business.

Chief Executive Cees ‘t Haart, a Dutchman with a strong background in the dairy industry who took the job in June 2015, indicated that more changes would be made as part of his seven-year strategy called SAIL’22.

It looks like one investor does not trust the promise of a turnaround. Steven Romick, portfolio manager of FPA Crescent Fund has used the opportunity to divest all of his remaining Carlsberg shares for about 36.6 million dollars close to an all-time high of the share price.

Today after the announcement of the half year’s results the Carlsberg share dropped by more than 5%.

 

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