Carlsberg's Medium-Term Guidance Is Impressive, but May Not Be Maintainable

Equity Analyst

Diana Radu

Carlsberg has a reasonably strong namesake brand and a portfolio of superpremium brands that position it well for ongoing premiumisation. It has strong positions in a cluster of generally small markets, notably Scandinavia and western China, but is a second-tier player in other larger markets such as the UK, Germany and Vietnam. 

Nevertheless, Carlsberg had historically struggled to earn its cost of capital, but under several strategic programs, including Funding the Journey and SAIL'22, Carlsberg has closed the financial performance gap to its peers and delivered much stronger returns on capital and returns to shareholders. Organic sales grew by over 3% annually over the five years of the program, in spite of the covid-19-related declines in 2020, and almost 200 basis points were added to the operating margin, which stood at 16.3% on an adjusted basis at the end of the program in 2022. Benchmarking against competitors, however, we believe there is further room for improvement, and we are encouraged that the recently unveiled Accelerate Sail strategy suggests more profitability improvement to come. Mix should play a pivotal role. Some of Carlsberg's markets, including China, are undergoing structural premiumization, and the premium and above portfolio, including the Tuborg and 1664 lager brands and Brooklyn craft beer, as well as line extensions to the Carlsberg brand, including an alcohol-free line, should continue to grow at rates above the market.

Medium-term guidance under Accelerate Sail, the latest five-year plan, is 4%-6% organic revenue growth, an uptick from the previous target of 3% to 5% growth. We think this is reasonable but we forecast medium-term growth at the low end of that guidance. We expect volume declines of beer in developed markets to be offset by value growth from premiumisation elsewhere. Carlsberg has runway for growth in Southeast Asia, where consumption increases and premiumization should drive multiyear growth.

To achieve its financial targets, Carlsberg will have to walk a line between utilizing commercial investments, particularly in its premium brands, to drive growth, but not investing so much that margin expansion is inhibited.

Business Strategy & Outlook

Stronger execution and a focus on returns on capital employed contributed to Carlsberg generating excess returns on capital over the last eight years, but we still believe the company lacks the structural competitive advantages to ensure this performance can be maintained for at least a decade. 

We are not too concerned about Carlsberg’s smaller global volumes relative to AB InBev and Heineken because it is regional scale that creates a cost advantage. The provincial nature of most beer brands means that costs (packaging, manufacturing, distribution and marketing) are leveraged on a regional basis. Even on this basis, however, Carlsberg lags its closest competitors, with the bulk of its volumes spread over competitive markets in which it has fairly low market shares.

Carlsberg’s most competitively advantaged market is Asia. According to Euromonitor and data disclosed by the company, Carlsberg has volume shares of 56% in Nepal, where it is the leading brewer, and of 43% in Malaysia, where it is number two. These are growing and premiumizing markets, but Carlsberg’s position is not dominant in the way Ambev is in Latin America or Heineken is in parts of Southeast Asia. Volume share exceeds 50% in the markets where Ambev and Heineken are most dominant. Even in China, which became the company's largest market when the operations in Russia were divested, Carlsberg held a volume share of just 7% in 2022, through its consolidation of Chongqing. It should be noted, however, that Carlsberg’s footprint in China is limited to western provinces, where its regional share is roughly 66%, and that on a value basis, Carlsberg’s market shares are higher in these markets because of its skew to premium brands. Nevertheless, the fragmentation of Carlsberg’s volume across its footprint is detrimental to the creation of a cost advantage.

Western Europe is Carlsberg’s largest segment by volume, revenue, and EBIT, but this is a competitive market in which Carlsberg is often a second-tier brewer. Western Europe displays the characteristics of “aspirational” markets: developed economies in which alcohol consumption has often peaked and the consumer is trading up not only within the beer category, but out of it and into wine and spirits. Mainstream beer brands compete against each other on price, while also facing competition on product differentiation from Belgian beers, and more recently, US-style craft, in the superpremium segment. Only in very few markets do any brewers have a critical mass of scale to be able to operate at a lower cost structure than peers, therefore. From the GlobalData figures, only in Norway and Poland does Carlsberg have a dominant volume share, although it is also the market leader in Sweden and Switzerland, and we believe it’s volume share is slightly over 50% in Denmark. In almost all other Western European markets, its market share is in the single digits, and its competitive positioning is weak. This was apparent in 2015 when Tesco removed Carlsberg from its shelves during a cull of brands and SKUs. Eastern Europe is Carlsberg’s other major market, but in no single market does its volume share exceed 20%.

None

Economic Moat

Carlsberg AS

Earnings data Q1 2024

Carlsberg A/S engages in the production and marketing of beer, craft and specialty, and non-alcoholic beer. Its products include Carlsberg, Tuborg Green, 1664 Blanc, Baltika, and Somersby Apple Cider. It operates through the following geographical segments: Western Europe, Asia, and Central and Eastern Europe. The company was founded by Jacob Christian Jacobsen in 1847 and is headquartered in Copenhagen, Denmark.

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I expect growth to revert back to mid single-digit as guided, with margin expansion and rerating of valuation. The company's revenue is split between Western Europe (50%), Asia (32%), and Central and East Europe (18%). Premiumization is a major trend that should continue to support higher pricing growth.

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