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Russia?s brewer Baltika used to be Carlsberg?s profit engine. Not any longer (Source: Carlsberg Group)
23 February 2018

Carlsberg writes down Baltika by USD 800 million

Danish brewer Carlsberg reported 2017 profit well below analysts’ expectations, hit by a fall in sales and a large write-down in its key Russian market.

Carlsberg, the world’s number three brewer, said on 7 February 2018 that beer volumes were 112 million hl in 2017, down from 117 million hl in 2016. Worst hit was Russia, where volumes declined 14 percent and its market share fell to 31.9 percent from 34.6 percent.

Russia is the main market in Carlsberg’s Eastern Europe region. Its unit Baltika once represented almost half of Carlsberg’s operating profits, but that has fallen to 16 percent now.

A law in Russia limiting the size of a plastic beer bottle to no more than 1.5 litres as part of efforts to curb alcohol abuse dented beer sales in the country last year.

Russia has long been a problematic market for brewers due to sales and advertising restrictions and tax hikes designed to curb drinking. Carlsberg has struggled in Russia since it took control of the country’s largest beer brand Baltika in 2008.

According to Carlsberg, the price gap to its competitors in the Russian beer market has increased to 20 to 30 percent. However, Carlsberg will not try to regain lost market share because this would mean entering into a price war. Moreover, it expects its local competitor, the merged AB-InBev-Efes company, to focus more on value than on volumes.

Carlsberg said its net profit for the year was hit by a DKK 4.8 billion (USD 800 million) impairment of the Baltika business in Russia. That pushed net profit for 2017 down to DKK 1.3 billion (USD 215 million), well below last year’s DKK 4.5 billion and analysts’ average forecast of DKK 4.9 billion. Revenues rose one percent to DKK 61.8 billion (USD 10.2 billion).

To console its shareholders, Carlsberg recommended an increase in dividend payments for 2017 by 60 percent to DKK 16 per share. The dividend payout equals 50 percent of Carlsberg’s profits.

The company said it expected operating profit to grow by a percentage in the mid-single-digits this year.

Danish Jyske Bank’s Frans Hoyer argues this is a very modest guidance and could indicate that Carlsberg might have to lower its beer prices in Russia – contrary to what its executives say – to end the market share erosion. But then again, all the other brewers in Russia might see some sense eventually and hike their prices as well. After all, according to Carlsberg, none of the others are currently making any profits.

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