Russia, China and UK are hurting Carlsberg

Just when you think things cannot get any worse, they will. Such is Murphy’s Law and Danish brewer Carlsberg was forced to acknowledge as much when on 11 November 2015 it had to announce that the situation in Russia was bad, that China was beginning to look grim too and the UK remained a headache. Given such a triple whammy, Carlsberg is to launch a global restructuring programme which will lead to the axing of 2,000 white-collar jobs. About 1,300 employees have already been notified, media say.

The cull of 15 percent of white collar staff comes as Carlsberg reported nearly DKK 10 billion (USD 1.4 billion) in restructuring charges and reductions in the value of its assets. Most were booked in the third quarter, pushing its net loss to DKK 4.45 billion (approximately EUR 600 million/USD 640 million), compared to a profit of DKK 2.10 billion one year ago. Carlsberg said charges relating to Russia would amount to DKK 5 billion, while those relating to the Chinese business would be DKK 4 billion and to the UK business would be DKK 600 million.

Many of the charges were due to Carlsberg’s Baltika brewery in Russia, where the beer market shrank 10 percent in the third quarter. Carlsberg’s own beer sales were down 18 percent. For the nine months 2015 Carlsberg’s volume loss in Eastern Europe amounted to 16 percent. Baltika is also losing share to smaller independent brands in the country, said Cees ’t Hart, who became Carlsberg’s CEO in June and will update investors on the company’s strategy in the first half of 2016.

“We have now concluded that the difficult market challenges will persist for the next few years and, consequently, that the decline of the beer category will continue in Russia”, Carlsberg said.

Carlsberg, the world’s number four brewer, has long faced problems in Russia and the Ukraine, from where it derives over a quarter of its operating profit, but the company is now also restructuring in China and Britain.

Despite the news, Carlsberg’s share price jumped by as much as 8 percent as investors seemed relieved they did not have to wait until next year’s strategy review for the write-downs and felt the new chief executive’s assessment of the business was realistic. The recovery plan, which Carlsberg calls “Funding the Journey”, is expected to cut costs by as much as DKK 2 billion (USD 290 million).

Carlsberg estimates that its 2015 operating profit will decline by high single-digit percentages, compared to the growth it had anticipated at the beginning of the year.

“It is a sign of the new management ’kitchen sinking’ and cleaning up after the old management. All of us have been expecting the measures regarding Russia, but the big measures on China are quite a surprise”, the analyst Michael Friis Jorgensen was quoted as saying.

The business in Asia, including in China, was the only major regional unit to deliver operating profit growth in the third quarter but Carlsberg said its breweries in eastern China will be loss-making in the foreseeable future. Carlsberg’s Chinese beer volumes declined 1 percent organically in the third quarter while the overall beer market was down by an estimated 5 percent.

Mr Hart said the company may shut down a few small breweries in eastern China and that by contrast, business in western China was doing well.

In Britain, Carlsberg said its finances had deteriorated in a highly competitive market and its woes there have been compounded by a recent delisting by a major retailer.

Carlsberg’s new CEO already let it be known that the company would not be interested in buying China’s top beer brand, CR Snow, should Chinese regulators demand its sale as a part of AB-InBev’s takeover of SABMiller.