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RPT-Fitch: Worst Over for Russian Brewers, Earnings Set to Stabilise
February 25, 2014 / 10:46 AM / 4 years ago

RPT-Fitch: Worst Over for Russian Brewers, Earnings Set to Stabilise

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Feb 25 (Reuters) - (The following statement was released by the rating agency)

Russian beer volumes are likely to fall for a sixth straight year in 2014 as the full effect of sales restrictions is felt, but the decline should be smaller than in 2013, Fitch Ratings says. Meanwhile, a consumer shift towards more expensive brands should help brewers’ profits begin to stabilise. As the biggest operator in the country, Carlsberg Breweries (BBB/Stable) would be the main beneficiary of an improvement in the Russian market, but risks remain from the potential for further excise duty increases, another consumer spending slowdown and rising costs.

The Russian beer market fell a further 8% in 2013, taking the total volume decline since 2009 to over 20%. Sales have been hit by events including a sharp increase in excise duties followed by restrictions on the hours and location of beer sales, which came into force in July last year. We believe the worst of the volume decline should now be over, but the market will probably still shrink by a further 2%-5% in 2014, as consumer spending power will remain under pressure.

The restrictions on where beer can be sold will also put some pressure on margins as they have shifted more sales to large supermarket chains. These retailers have a much stronger negotiating position than the kiosks banned by the recent regulation and will therefore probably obtain better prices from the brewers. This changing sales pattern has heavily affected Efes/SABMiller’s 2013 sales volumes - it opted to withdraw from some supermarkets rather than accept lower margins.

Scope for improvement in brewers’ sales mix balances these pressures, as consumers gradually switch to higher-margin premium brands. We expect the industry’s commitment to reducing the sale of beer in large plastic bottles to help this premiumisation trend into 2014. This should push consumers toward higher-margin products, but will also have a negative impact on sales volumes.

Overall the modestly improving picture in Russia is positive for Carlsberg, whose operations in the region have been recovering since late 2011 after it made structural changes and some price increases.

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