Carlsberg will keep its breweries in Russia running even though most are operating at reduced capacity, despite other brewers closing plants as Western sanctions over Ukraine hamper an already faltering economy, CEO says

June 19, 2014 () – Denmark's Carlsberg will keep its breweries in Russia running even though most are operating at reduced capacity, despite other brewers closing plants as Western sanctions over Ukraine hamper an already faltering economy.

Once a safe bet in a country where beer was considered a soft drink, the Russian market has been hit by new laws, tax hikes and the economic downturn that has stopped the growing middle class from buying extras. Tighter rules intended to curb alcoholism have already prompted the world's largest brewer, Anheuser-Busch InBev, to shut its third Russian plant in less than two years, but Carlsberg believes in a turnaround.

"It's not easy, we do have empty capacity, but strategically we are trying to hold our assets because there is reason to believe this market will come back to growth," said Carlsberg's chief executive Isaac Sheps.

"Geopolitical unrest in the region [affects] the mood, the atmosphere, the economy, especially from a consumer goods perspective. And this is another thing we are all worried about because any unrest is not positive for businesses and you need things to stabilise," he said.

Sheps said almost none of its 10 Russian breweries were operating at full capacity but the maker of Baltika and Tuborg beer had faith that Russians would soon return to beer when they had got used to the new regulations and the economic crisis had eased.

"If in 2008 you had 77 litres-per-capita consumption and we ended 2013 with 59 litres, this is a gap which cannot come from the change of… attitude towards beer, it's coming from different external pressures, so when these pressures are eased, we do believe that these numbers will go back," he said.

Last month, the world's fourth-largest brewer cut its outlook for the Russian market and now expects it to decline by middle single-digit percentages in beer volume this year, compared with the earlier guidance for a low single-digit decline. Sheps said if the beer market fell at the same pace for another year or two, Carlsberg would be forced to close some breweries, but it would do all it could to prevent this.

"You can do a lot of efficiency programmes before you close a brewery… We are very far from it. Yes, we feel the burden… but we are not in a disastrous position."

The beer market in Russia fell by 8 percent last year and 5 percent in the first quarter, hurt by restrictions on sales put in place as part of Russian President Vladimir Putin's drive to curb drinking and promote healthy lifestyles.

His efforts, intended to stem a demographic crisis in Russia, have worked. A ban on beer sales in street kiosks and time restrictions on when it can be bought have helped cut beer sales by 25 percent since 2008.

But Sheps said Russians were unlikely to restrict their beer consumption to a large extent.

"The logical question is: would Russians drink only 40 litres per capita? It's tough to forecast but it does not look logical, it does not make sense."

To make up for a lack of impulse buying, brewers use multipacks to encourage consumers to stock up at home while focusing on premium brands to attract high-income consumers, usually the last to be hit when the economy falters.

"While we are only using about 70 percent of our capacity, the rest I have to recover by efficiency or by growing the top line in more premium and super-premium brands, which are more profitable.

"We are seeing a growth in Russia in the premium and super-premium segment. It is growing but it is still small because this is a small level of people who drink it."

He said beer sales in multipacks started slowly but were gathering pace and the company was bringing new varieties in all price categories to reinvigorate consumer interest.

"We are growing market share so we are doing relatively better than our competitors," he said. Competitors were closing plants in an attempt to be more efficient, but they were still selling their brands, Sheps added. - Reuters

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