Everyone knows that when it comes to apologists and scapegoats, Q1 was all about weather excuses, and as SocGen already showed earlier today [9]when it took a $730 million charge on its Russian subsidiary, Q2 misses will all be Ukraine's fault, which is ironic because as recently as a month ago experts were screaming over each other how little Ukraine matters for the global economy, how meaningless Russian exposure is to western banks and so on. But while one can at least superficially justify a bank provisioning against deposit flight and the accumulation of bad debt in a country in which paying one's debt is the last thing on the population's mind, a new and quite different victim of the Ukraine crisis was revealed earlier today when beer titan Carlsberg swung to a net loss and issued a profit warning: beer.
One would think revolutions and civil wars are bullish for thirst and alcohol consumption: after all it is far easier to charge a tank when hammered than sober. However, when it comes to beer at least, one would be wrong.
As the WSJ explained [10], the reason why Carlsberg - the fourth largest brewer in the world - had some less than pleasant words about events in the Ukraine, "the Danish brewer has built up a significant exposure to Russia in recent years, driven by beer brands such as Baltika and Tuborg, amid a wider bet it has placed on Eastern Europe." The bet got so big that Russia is now its largest single market. And now comes the hangover.
The world's No. 4 brewer downgraded its full-year outlook for net performance to reflect Russia's fragile economic situation, saying it now expects net profit to grow by a low-single-digit percentage in 2014, instead of the mid-single-digit percentage it previously expected. The ruble's weakness against the euro, along with currency headwinds in some other markets, is a key reason behind the downgrade.
To be sure Obama did warn of "costs" in Russia, but as we have noted repeatedly, he did not clarify that the costs would be borne by western companies.
That said, Carlsberg decided to go for the kitchen sink approach, and in addition to blaming the Ukraine crisis also reached for that old standby, drumroll, "poor weather." And just to seal the trifecta of excuses, it also threw in the slowing Chinese economy in the bucket.
Carlsberg was also hit by poor weather conditions in China and a weak economy in Vietnam. It said organic growth conditions, excluding the impact of foreign exchange, remains strong and the performance of its premium labels is strengthening.
"Included in the outlook is a more uncertain macro situation in Russia and Ukraine," the company said. Interruptions in Ukraine were very limited through March 31, but the brewer has had to stop production at times in recent months and the government at the beginning of May boosted beer excise duties by 43%, leading to price increases of 5% to 6% for Carlsberg products.
Considering that the company reported a 14% net revenue decline in Eastern Europe in the first quarter compared with a year earlier, and its overall operating profit fell by about a third, perhaps there is a more systemic reason for the plunge in demand for its products: such as the locals, not only in Russia but elsewhere, simply no longer have the discretionary income to afford its products. Indeed, the facts bear this out:
Even before the crisis in Ukraine, which has affected many European companies with a presence in Russia, brewers were struggling due to regulatory changes and other factors that pulled the overall Russian beer market down. Last month, Dutch brewer Heineken NV, one of Carlsberg's main rivals, reported a 37% fall in first quarter net profit, citing "challenging beer market conditions in Russia."
But let's not focus on this too much as it would destroy the entire narrative that the reason why some $50 billion in projected growth was wiped out from the $17 trillion US economy had to do with "harsh weather."
As for Asia, apparently it snowed in China and Japan too. And when it snows there, nobody drinks beer.
Group beer volumes for Carlsberg declined 3% during the first quarter, as organic growth in Western Europe was offset by declines in Eastern Europe and Asia. In addition to unfavorable weather conditions in Asia, Carlsberg also pulled back from unprofitable volumes during the quarter.
But before we cry for Carlsberg we are confident that the company, which certainly has the balance sheet for it, will be raided by some activist who demands it stop expanding here and there and instead use the bulk of its cash to buyback its stock - after all what better way to give the false impression that all is going swimmingly with a company than it levering up and using the proceeds to be even more shareholder friendly.
Finally, as for end demand, this is Russia we are talking about: if anything, what is left unsaid here is that the locals, who may indeed have shunned beer, have simply moved on to cheaper, and more concentrated alternatives. Speaking of, is Popov vodka public?