Morningstar | Carlsberg Playing Its Hand Well but Is Lower Quality Than Some Competitors
Carlsberg has its fair share of challenges, but we think it is embarking on the right strategies to improve execution in a highly competitive industry. The company's largest market is Russia, which has been in a multi-year decline due to macroeconomic volatility, a decade-long government clampdown on the availability and affordability of beer, and a shrinking drinking age population (although the market appreared to stabilize in 2018). Even in Western Europe, the emergence of craft, the shift to the off-trade, and pricing pressure from large retailers, have created an unfavourable cocktail of cyclical and secular headwinds that are likely to hinder long-term organic growth.After several years of being buffeted by these challenges, Carlsberg changed its senior leadership in 2015, and the new management has undertaken a coherent set of strategies to deliver the margin opportunity that for several years we have believed was possible. SAIL '22 is a strategy umbrella for initiatives, including portfolio streamlining and brand invetments, that are designed to cut costs in order to simultaneously reignite growth and expand margins. The Funding the Journey strategy to finance these strategic priorities came to an end in 2018, and Carlsberg must remain focused on cost control to meet its increasing customer acquisition costs. It is significant that management has attained the buy in of its employees, with variable component of compensation for 200 senior employees linked to the delivery of these benefits.The task of kick-starting growth would be easier if Carlsberg had an economic moat, but the removal of the flagship brand from the shelves of Tesco in 2015, for example, shows that with quite fragmented market share in most countries, Carlsberg is at a competitive disadvantage to its peers. Ironically, the market where Carlsberg does have a dominant distribution platform is Russia, and although it is not as meaningful for Carlsberg as it once was, having fallen to 16.5% of Carlsberg's EBIT in 2018 from 43% in 2009, the strategy under SAIL '22 to transform Russia has a chance of success, although the planned combination of AB InBev and Efes in that market will not help.
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