Heineken, Carlsberg Hit by Weak European Demand; World’s No. 3 and 4 Brewers Keep Looking to Emerging Markets

August 21, 2013, 3:01 a.m. ET

Heineken, Carlsberg Hit by Weak European Demand

World’s No. 3 and 4 Brewers Keep Looking to Emerging Markets

ROBIN VAN DAALEN and CLEMENS BOMSDORF

Brewers are continuing to struggle with weak demand in Europe and an improvement isn’t expected this year, Heineken NV HEINY -4.17% and CarlsbergCARL-A.KO +0.34% said Wednesday, with both adding that they will pursue further cost cuts and look to emerging markets to boost their businesses. Like Belgian brewer Anheuser-Busch InBev ABI.BT -0.01% and U.K.-based SABMillerSAB.LN -0.88% PLC, Heineken and Carlsberg say sales were hurt by bad weather and slack demand in Western Europe and the U.S.To offset tough circumstances in developed markets, which are suffering from weak economic conditions as well as a change in consumer behavior and tougher legislation, the world’s largest brewers have been snapping up rivals in Asia and Latin America.

“In Europe and the U.S., consumer confidence remains low, aggravated by bad weather and slowing growth in some developing countries,” Heineken Chief Executive Jean-François van Boxmeer said, summarizing the first six months of the year.

Heineken, the world’s No. 3 brewer by sales, whose brands include Amstel and Sol as well as its eponymous lager, said it expects no material change to underlying conditions across most of its markets for the rest of the year, despite benefiting from better weather conditions in July in Western Europe and anticipated volume improvements in some developing markets, such as Mexico and Nigeria.

Carlsberg, the fourth-biggest brewer by sales, gave a similar reading. “For the first six months, the group achieved earnings growth despite challenging market conditions in Western and Eastern Europe,” CEO Jorgen Buhl Rasmussen said. The Danish brewer’s brands include Carlsberg, Tuborg, Kronenbourg 1664 and Holsten, as well as Somersby Cider.

Heineken’s second-quarter beer volume declined 7% in Western Europe and 6% in Central and Eastern Europe. For Carlsberg, quarterly beer volume fell 6% in Western Europe and 6% in Russia, while Eastern Europe as a whole improved slightly, up 0.7%.

Carlsberg sales continued to be hurt by the Russian government’s aim to reduce alcohol consumption. The sales restrictions, coupled with a slowdown in economic growth and lagging consumer sentiment in Russia, has prompted the Danish brewer to downgrade its outlook for that country. Instead of flat beer demand this year, the company now expects a percentage decline in the midsingle digits.

While Carlsberg has been pushing into Eastern Europe and Asia, Heineken turned to Latin America and Asia. Since 2010, Heineken has spent more than $10 billion on acquisitions to increase its presence in emerging markets.

To offset slowing growth in the West, Carlsberg turned to Russia, which eventually became its largest market. In 2008, it bought the 50% it didn’t already own in Baltika Breweries, the market leader in Russia. But in recent years beer sales have declined while the government increased regulation.

Asia continued to show strong growth. On an organic basis, Heineken increased volumes by 4% during the second quarter in the region, while Carlsberg expanded quarterly volumes by 7%.

Both Heineken and Carlsberg remain upbeat about prospects for emerging markets. “The majority of this €1.4 billion ($1.88 billion) [capital expenditure] goes to developing markets,” said René Hooft Graafland, Heineken’s chief financial officer. “We are building greenfield breweries in Ethiopia and Myanmar and we’re expanding in countries like Vietnam, Nigeria and Mexico.”

Carlsberg was the first Western brewer to announce an investment in Myanmarearlier this year and in recent years the Danish company’s growth came almost solely from Asia. While Carlsberg revenue from 2010 until 2012 grew only 4.4% in Western Europe and 7.2% in Eastern Europe, the increase in Asia was 62%.

Still, for Carlsberg, Asia remains the smallest of the three markets and the operating margin there in the year 2012 was 18.5%—much lower than the 22.1% in Eastern Europe but higher than Western Europe’s 13.6%. The seasonality of the beer business means that the performance of brewers is very volatile from quarter to quarter and less so from year to year.

While Carlsberg only has a presence in Europe and Asia, Heineken is active in the U.S., Latin America and Africa as well. Heineken’s volumes were down 1% during the second quarter and 2% for the first half of the year, with declines in the U.S., Brazil and Mexico offsetting increases in the Caribbean and Canada.

Apart from turning to higher-growth economies to offset declines elsewhere, both brewers have been cutting costs and said they would continue to do so.

Carlsberg wants to continue to streamline its business, in particular in Western Europe. Heineken raised its target for cost savings to €625 million from an original €525 million by the end of 2014.

Heineken’s net profit fell 17% to €639 million ($857.4 million) for the six months ended June 30, compared with €766 million a year earlier that included a gain on the sale of its business in the Dominican Republic. Revenue increased 6.6% to €9.35 billion, boosted by the acquisition of the rest of Singapore-based Asia Pacific Breweries that it didn’t already own. On an organic basis, revenue declined 1% amid lower volumes, partly offset by higher prices.

For the second quarter, Carlsberg posted net profit attributable to shareholders of 2.07 billion Danish kroner ($372.4 million), down 38% from 3.36 billion kroner a year earlier. Sales increased 1.6% to 19.64 billion kroner.

August 21, 2013, 1:03 p.m. ET

Time to Say Da to Carlsberg

Danish Brewer Poised to Make Inroads in Russia

JOHN JANNARONE

Selling beer in emerging markets comes with its risks. For Carlsberg,CARL-A.KO +0.34% it has felt like Russian roulette.

The Danish brewer ventured into Russia in 2008 with the purchase of Baltika Brewerie. Thanks to the deal, Eastern Europe accounts for about 40% of Carlsberg’s operating income, nearly as much as its core Western European markets.

But since Carlsberg arrived, the Russian government has gone to war on beer consumption through bans on advertising and restrictions on where the beverage is sold. Carlsberg’s shares have risen just 25% in the past five years, while Heineken‘sHEINY -4.17% rose 68% and SABMiller‘sSAB.LN -0.88% jumped 167%.

But the company’s second-quarter results issued Wednesday suggested Carlsberg will come out alive. While overall beer consumption continues to decline, the company said it gained more market share than expected last quarter and that it won’t be long before consumption begins to increase.

There is reason to take Carlsberg seriously. One is that Russians consume more spirits per capita than northern Europeans but less beer. And in recent years, the declines in vodka consumption have been sharper than the pullback in beer drinking.

A stronger economy also could help Russians knock back more suds. Credit Suisse‘s CSGN.VX -1.00% Sanjeet Aujla points out that real wages have stopped falling in recent months and may soon begin to rise.

And cheaper barley, a key ingredient in beer, may give another kick to profits. Mr. Aujla says Russian barley harvests have been weak for the past three years, but a healthy crop this year could mean a 30% decline in barley costs.

Of course, there may be hiccups along the way. A ban on beer sold in kiosks has hurt sales more than the company expected in recent months. Consumers who begin visiting supermarkets to make beer runs may be tempted to sample the wider variety of beers they find on the shelves.

But Carlsberg shares still look priced for disaster at 12.7 times next year’s earnings, several notches below SABMiller and Heineken. At that price, it’s worth risking a hangover.