Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Carlsberg's sales were dented by Tesco's decision to pull many of the brewer's bottles off its shelves. But Carlsberg, too, is itself thinning out its sprawling range of beers.

Stock Recovery
Carlsberg shares have reclaimed much of the ground they lost in August
Source: Bloomberg

Tesco is slashing the number of products it sells to fend off German discounters Aldi and Lidl. At Carlsberg, the foe is Megabrew, the behemoth created by AB Inbev's $107.5 billion takeover of SABMiller.

AB Inbev is best known for the ruthless-cost cutting that has delivered wider margins than any of its peers. Its Ebitda margin was almost 40 percent last year, compared with Carlsberg's 20 percent Ebitda margin, according to Bloomberg data.

Beer Money
Carlsberg's Ebitda margin lagged rivals last year, making cost cuts imperative
Source: Bloomberg

With Megabrew poised to control about half the industry's profit, other brands are being forced to reduce costs. Carlsberg's first quarter trading update on Wednesday showed that, so far, it is making quite a good fist of it.

New CEO Cees't Hart plans to make between 1.5 billion to 2.3 billion kroner ($230m to $350m) of annual savings by 2018 to boost earnings. To put that in context, it's equivalent to about a third of Carlsberg's pretax profit for 2015.

Hart said on Wednesday that Carlsberg had cut about 950 individual products, about half the total it's targeting. He has closed eight breweries in China, and eliminated 2,000 white-collar jobs.

Carlsberg says it is too early to say whether this will mean savings will reach the upper end of the target. But it was sufficiently confident to maintain its forecast that organic operating profit will expand by a low single-digit percentage this year.

But just as revenue from Russia and eastern Europe rebounds, a new problem is emerging: Asia. Carlsberg said China will remain weak for the remainder of the year, while much of the rest of the region is slowing.

Sales Breakdown
Asia accounts for only about a quarter of Carlsberg's revenue
Source: Bloomberg

That's a problem because while Asia accounts for only a quarter of revenue, it's the brewer's fastest growing region, and has the highest operating margins. In China, Carlsberg has been trying to push more expensive European lagers rather than what it euphemistically calls its discount portfolio. Wednesday's announcement only raises doubts about whether this effort will pay off.

That note of caution helped to drive the stock 3 percent lower on Wednesday, almost erasing its gain since the start of the year. But that's still a better performance than the wider Stoxx 600 Food and Beverage Index, which is down 4.6 percent this year.

Carlsberg shares trade for slightly less than 20 times estimated earnings, a 7 percent discount to its peers, according to Bloomberg Intelligence. Slowing Asian sales will only make it even harder for Hart to narrow that gap.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net