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Carlsberg in Emerging Markets A breeze of optimism blew through the office of Carlsberg A/S’s CEO,...

Carlsberg in Emerging Markets

A breeze of optimism blew through the office of Carlsberg

A/S’s CEO, Jørgen Buhl Rasmussen. After finally gaining

100 percent control over the giant Russian brewery

Baltic Beverages Holding (BBH), and with the investments

in Western China beginning to bear fruit, the

newly appointed CEO was confident that the Danish

brewing company’s intensified focus on emerging markets

would pay off. The company was counting on tapping

the massive potential in emerging markets in order

to achieve a much-needed reduction in its dependency

on the maturing and stagnating Western European beer

markets, which accounted for a full 61 percent of the

company’s revenue in 2007.

Indeed, Carlsberg’s emerging market efforts had

come a long way. In the Russian market, which was considered

to be one of the fastest-growing beer markets

in the world, Carlsberg enjoyed market-leader status

through its ownership of BBH. In that market, it had a

sales volume of approximately 23 million hectoliters of

beer in 2007 and revenue of kr 9 billion (US$1.8 billion).

As for the highly promising Chinese market, which was

regarded as the world’s largest beer market in terms of

population and size, the Danish company had achieved a

55 percent market share in the western parts of the country,

and it operated 20 brewery plants in China with close

to 5,000 employees. In fact, as Carlsberg recognized that

the European markets would eventually reach a point of

saturation, the aim of the Chinese investments was to

create a platform for future growth and revenue.

The outlook for Carlsberg had not always been as

bright as it appeared by 2008. Carlsberg’s emerging

market strategy had taken a long and winding road. For

instance, Carlsberg’s acquisition of the BBH shares was

the result of a troubled and expensive partnership with

Norwegian Orkla ASA. In addition, before Carlsberg

had become successful in the western provinces of China,

the company had spent plenty of valuable time and

resources trying to enter the rich provinces of southeastern

China, a strategy that had failed. Furthermore, in the

early 2000s, Carlsberg was on the brink of being reduced

to a secondary player in the global beer market—as the

consolidation of the industry proceeded, Carlsberg A/S

became an obvious takeover target and was also at risk

of being cornered as a small regional player. Nonetheless,

in 2008 as the first decade of the millennium neared an

end, Carlsberg was the fifth-largest brewery in the world

in terms of volume produced. Much of this reversal of

fortune could be attributed to the company’s emerging

market focus.

Despite Buhl Rasmussen’s optimism about the future,

the real question was how Carlsberg A/S could successfully

continue to capitalize on its growing engagement

in emerging markets. “We don’t know how large the

Chinese market will be in five years, and I don’t know

if China can become a new BBH,” the CEO explained,

“but it is definitely not impossible, as the market is

enormous.”1 It was no surprise that competition was

becoming increasingly fierce in this booming emerging

market, and history had clearly proven that doing business

successfully in this market required unconventional

approaches.

Introducing Carlsberg A/S

The successful course and strategy which Carlsberg has

pursued in recent years will remain basically the same

no matter what. The strategy has proved its worth with

growth and better results, and it is now strongly rooted in

our organisation. Our business is thus to focus on the beer

markets in Western Europe, Eastern Europe and Asia.

— Carlsberg A/S CEO, Jørgen Buhl Rasmussen2

As the fifth-largest brewing company in the world,

Carlsberg A/S’s vision was “our brands will be the consumer’s

first choice, and we will lead our industry in

profitability and growth through a culture of quality,

innovation and continuous improvement.” Moreover,

Carlsberg saw itself as “probably the best beer company

in the world.”3

The core businesses of Carlsberg A/S were brewing,

marketing and selling beer. In 1847, J.C. Jacobsen opened

the doors of Carlsberg A/S’s first brewery in Copenhagen,

Denmark, and the first foreign brewery was established

in Malawi in 1968. In 2007, the company had 33,000  employees, held a portfolio of 75 breweries around the

world and sold approximately 115 million hectoliters

of beer in more than 150 countries, with net revenue

of 44,750 million (€6,000 million)

Carlsberg’s areas of operation focused on the mature

beer markets of Western Europe, the growth markets of

Eastern Europe and the emerging Asian markets. Behind

this strong position of the company was a major reorientation

and restructuring of the company in recent years:

“Progress in revenue and share prices has been driven

by a fundamental revolution of the company,” explained

former CEO Nils Smedegaard Andersen. “We have purchased

and then professionalized the business. At the

same time, we have worked with the structure.”4

Organization

Despite Carlsberg’s position as the fifth-largest brewery

in the world by 2008 (see Exhibits 2 and 3), at

the beginning of the 2000s, it had found itself largely

excluded from the league of large international breweries.

Carlsberg, it then seemed, was losing ground as one

of the strongest brands in the world, and was considered

by analysts to be an obvious takeover target for larger

breweries. In an attempt to cope with these difficulties,

a merger with Norwegian Orkla ASA’s brewing activities

was executed in 2000 and resulted in the creation

of Carlsberg Breweries. Carlsberg A/S owned 60 percent

of the new entity, while Orkla held 40 percent. Among

the positive aspects of this merger was Orkla ASA’s 50

percent ownership in Baltic Beverages Holdings (BBH),

which offered Carlsberg the possibility to strengthen its

position in the Eastern European markets. However, after

a number of strategic disagreements, Carlsberg bought

Orkla out of the merger in 2004. Although this move put

Carlsberg into severe debt, former CEO Nils Smedegaard

Andersen was content: “We are market leaders in a handful

of large countries, we own half of the largest brewery

in Eastern Europe and we possess a majority share in

a number of European breweries.” He also emphasized

that “the acquisition of Orkla’s Carlsberg shares, as well

as Holsten, prove that, during the last five years, we have

reached a size and economic capacity that allow us to

invest very large sums of money.”5 employees, held a portfolio of 75 breweries around the

world and sold approximately 115 million hectoliters

of beer in more than 150 countries, with net revenue

of kr44,750 million (€6,000 million) (see Exhibit 1).

Carlsberg’s areas of operation focused on the mature

beer markets of Western Europe, the growth markets of

Eastern Europe and the emerging Asian markets. Behind

this strong position of the company was a major reorientation

and restructuring of the company in recent years:

“Progress in revenue and share prices has been driven

by a fundamental revolution of the company,” explained

former CEO Nils Smedegaard Andersen. “We have purchased

and then professionalized the business. At the

same time, we have worked with the structure.”4

Organization

Despite Carlsberg’s position as the fifth-largest brewery

in the world by 2008 (see Exhibits 2 and 3), at

the beginning of the 2000s, it had found itself largely

excluded from the league of large international breweries.

Carlsberg, it then seemed, was losing ground as one

of the strongest brands in the world, and was considered

by analysts to be an obvious takeover target for larger

breweries. In an attempt to cope with these difficulties,

a merger with Norwegian Orkla ASA’s brewing activities

was executed in 2000 and resulted in the creation

of Carlsberg Breweries. Carlsberg A/S owned 60 percent

of the new entity, while Orkla held 40 percent. Among

the positive aspects of this merger was Orkla ASA’s 50

percent ownership in Baltic Beverages Holdings (BBH),

which offered Carlsberg the possibility to strengthen its

position in the Eastern European markets. However, after

a number of strategic disagreements, Carlsberg bought

Orkla out of the merger in 2004. Although this move put

Carlsberg into severe debt, former CEO Nils Smedegaard

Andersen was content: “We are market leaders in a handful

of large countries, we own half of the largest brewery

in Eastern Europe and we possess a majority share in

a number of European breweries.” He also emphasized

that “the acquisition of Orkla’s Carlsberg shares, as well

as Holsten, prove that, during the last five years, we have

reached a size and economic capacity that allow us to

invest very large sums of money.” In retrospect, Carlsberg’s ownership structure was a

main contributor to the difficulties of financing expansion.

The largest shareholder of Carlsberg A/S was the

Carlsberg Foundation, which was established by J.C.

Jacobsen in 1876 with the purpose of funding scientific

research and social work. The Foundation was obliged to

own at least 51 percent of Carlsberg A/S’s shares, which

hindered the quick release of capital for acquisitions and

blocked potential fusions with large, foreign breweries.

This was a serious disadvantage for an international brewery fighting to be among the top players in a rapidly

consolidating industry.

Carlsberg A/S appeared unable to secure continuous

growth and development, and many feared that the

company would become a superfluous player. However,

after the buyout of Orkla ASA, Carlsberg’s management

started to look forward. As Povl Krogsgaard-Larsen, the

Carlsberg Foundation’s chairman, pointed out, “We then

began to prepare ourselves for our next move, namely to

change the charter of the Foundation. This would give

Carlsberg more freedom to act, as the Foundation was

locked in terms of capital after we bought Orkla’s shares

back.”6 As a result of this process, the Foundation was obligated

to own only 25 percent of Carlsberg A/S shares

after May 2007, which created more room for new capital.

In May 2008, Carlsberg, in cooperation with

Heineken, completed a kr104 billion (US$22 billion)

acquisition of the largest British brewer, Scottish &

Newcastle. This acquisition gave Heineken control over

Scottish & Newcastle’s British activities, while Carlsberg

obtained the remaining 50 percent of the Russian brewery

Baltic Beverages Holding. Naturally, this major

acquisition increased Carlsberg’s debt, which reached

kr58.3 billion in May 2008 (US$12.1 billion).

Towards an Emerging Market Strategy

With global beer brands such as Carlsberg Pilsner

(“Probably the best beer in the world ”), regional brands

such as Tuborg, Holsten and Baltika, and a number of

leading local brands, Carlsberg’s most important markets

were in Western Europe, which accounted for 61

percent of revenue in 2007. Furthermore, the company

held a strong position in the growth markets of Eastern

Europe and in the emerging Asian markets, with Russia

and China serving as the most notable examples. The

booming Indian market was also regarded as a market of

increasing importance. The Eastern European and Asian

markets accounted for 33 percent and 6 percent of revenue

in 2007, respectively (see Exhibit 3).

The global brewing industry of the mid-2000s was

characterized by a process of intense consolidation, in

which the number of breweries continuously declined.

By 2007, the industry was basically controlled by the

four largest breweries in the world (see Exhibit 4). This

consolidation process could be ascribed to changes in

consumers’ beer-drinking habits as well as increasing

production costs. In the mature European and American

markets, beer consumption had been falling as a result

of growing health consciousness and increased competition

from wine and spirits, while the Eastern European

and Asian beer markets were booming. Given the rising

costs of inputs, such as glass, aluminum and hops, the

large breweries were seeking to consolidate and increase

their market share as they searched for economies

of scale in relation to everything from production to

advertising. For the consolidation of foreign markets,

acquisitions and joint ventures with local firms were the

preferred modes of entry for the largest companies in

the beer industry, as they allowed acquiring companies

to gain access to local brands, distributional networks

and local market knowledge through partnerships with

local breweries.

As markets around the world became increasingly

consolidated, Carlsberg recognized its inability to become

a truly global company. The North and South American

markets had been lost to other well-known, established

breweries, and the potential offered by the African

markets was of limited interest. The Western European

markets were already consolidated to a great extent, so

Carlsberg decided to focus on Eastern Europe and Asia

as a means of achieving future growth. Investments in

these emerging markets were financed through revenues

from activities in the Western European markets.

Carlsberg’s activities in Eastern Europe, particularly

in Russia, were expected to offer sizeable potential for

several years. However, expectations were perhaps even

greater for the long-term potential of the Asian markets,

especially China, where Carlsberg was making considerable

investments. In fact, Carlsberg’s emerging market

focus was considered vital for the company’s ability to

remain a major player in the beer industry. “We want to

ensure that we have positions with future growth potential,

and we will be relatively patient,” former CEO Nils

Smedegaard Andersen argued in 2005. “We are unable

to say anything about how long it will take, but right now

we believe that a market-leading position will be interesting

in five to 10 years. How interesting will depend on

the competition, the economic development and many

other conditions.”7 The increase in optimism concerning

Carlsberg’s future was, therefore, due in large part to

the fact that the company had abandoned its strategy of

becoming a global player and instead focused on capitalizing

on emerging markets.

Central to Carlsberg’s business strategy was a focus

on value creation and profitable growth. The Western

European strategy was to ensure “improved profitability

through innovation and streamlining,” while “rapid

growth and higher earnings” were emphasized in Eastern

Europe. The Asian strategy was “long-term growth

through building up market positions” (see Exhibit 5).8

The beer industry’s mantra, according to Heineken

CEO Jean-Francois van Boxmeer, was that it was not worthwhile for a brewing company to be present in

a market where it was not the market leader or the

runner-up. This philosophy was shared by Carlsberg, as

indicated by Carlsberg’s press officer, Jens Peter Skaarup:

“What is important is the position we have on the markets

in which we are present.” In relation to the consolidation

of the industry, he argued that “competition is something

we are happy about. It makes us more ‘fit for fight.’”9

Carlsberg in Russia

Once Carlsberg gained access to BBH through the Orkla

ASA merger, the scene was set for Carlsberg to reap

the major benefits of the emerging Eastern European

markets. In 2007, when Carlsberg owned 50 percent of

BBH’s shares, the Russian brewery held a market share

of 37.6 percent in Russia and was the market leader. BBH

operations in Eastern Europe—Russia, the Ukraine,

the Baltic states, Kazakhstan, Uzbekistan and Belarus—

accounted for 23 percent of Carlsberg’s revenue in 2007.

The Russian market was undoubtedly the most important

for BBH, as it represented 79 percent of sales volumes

and 86 percent of operating profit. From 2006 to 2007,

the Russian market grew by 16 percent, while annual

beer consumption per capita amounted to 75 liters (the

average in the Scandinavian markets was 65 liters). Case 4: Carlsberg in Emerging Markets C-53

This positive development was expected to continue

in Russia in the coming years, as vodka consumption was

declining due to new taxes on liquor, which increased

the price of vodka. In fact, the Russian market was considered

to be one of the fastest-growing beer markets in

the world.

Carlsberg’s strategy in terms of BBH and the Russian

market was to grow organically by capturing new market

share. The company doubted that the Russian state

would accept more acquisitions by a company that was

the absolute market leader. However, for Christian

Ramm-Schmidt, BBH’s CEO, organic growth was not a

problem: “I cannot see why that should not be possible.

BBH is a national company, and it has the best brands,

the best distribution and strong management. That

should suffice to capture one to two percentage points

a year.”10 In order to support this strategy, Carlsberg

invested in BBH’s production capacity, infrastructure

and logistics, as well as in the building of strong brands

through product development and advertising.

BBH’s best-selling brand was Baltika, “a foamy,

golden brew with a delicate flavour of hops and the

aroma of first-class malt.”11 It was also Russia’s leading

brand with a market share of 38 percent in 2007. In

order to reduce Carlsberg’s dependency on the Russian

market, the company had great expectations for Baltika

on an international scale, and planned to introduce the

brand in Asia and the United States. “I can see possibilities

for Baltika in most parts of the world,” explained

Jørgen Buhl Rasmussen. “Just like you can sell Czech

beer almost everywhere today, I believe the same could

happen for a brand like Baltika.”12 Furthermore, Buhl

Rasmussen did not believe that introducing Baltika in

other markets would have negative effects on Carlsberg’s

other brands: “We do not see any risk at all of cannibalizing

our own brands.”13 BBH also distributed the Carlsberg

Pilsner and Tuborg brands to the Russian market, where

the aim was to capture the premium segments. In fact,

the Tuborg brand was BBH’s most important international

brand, as it represented 11 percent of revenue in

2007. The Carlsberg Pilsner brand accounted for two

percent of revenue in the same year.

However, as the Russian market was attractive,

Carlsberg was not the only international brewing company

interested in capturing market share as the Western

European and American markets began to stagnate.

Heineken acquired five breweries in Russia in 2005 and

was the third-largest beer company in the Russian market

in terms of volume by 2007. In addition, Heineken

was selling local brands, such as Volga and Ochata.

South African/British SABMiller was also active in the

Russian market with a six percent market share and was

planning to acquire more Russian breweries.

Carlsberg in China

Carlsberg’s history in China spanned as far back as the

late 1890s when the first barrels of beer were exported

from Denmark. It was, however, not until 1981—when

Carlsberg Brewery Hong Kong was established—that

Carlsberg began to produce beer in China. The Chinese

market was considered highly important for Carlsberg,

even though the yearly per capita consumption of beer

was just 29 liters in 2007. Given its vast size and high

population, China was the world’s largest market in

terms of production and consumption, and the market’s

estimated growth rate was up to eight percent per

year, compared to 0.7 percent in the United States and

2.5 percent in Europe. In other words, the market was

not to be underestimated.

The Chinese beer market was immensely fragmented

and highly regionalized with no truly national

brewery. Local and regional non-premium brands dominated

and price was often the determining factor. These

types of beer constituted more than 95 percent of total

beer sales. In addition, entry barriers were considered

to be very high, and the industry was capital intensive

in terms of production and distribution. In order to be

profitable, it was necessary to be either number one or

number two. For that reason, competition had led to a

process of consolidation, where the large international

breweries mainly competed on buying shares of regional

and local breweries.

Following initial setbacks, which led to a complete

overhaul of the original strategy, Carlsberg was positioned

somewhat differently from its competitors in the

competition for the Chinese market. In 2000, Carlsberg

had entered into a 50/50 joint venture with the Thai

company Chang Beverages Pte Ltd—a leading player

in Asian markets for alcoholic beverages—and created

Carlsberg Asia Ltd. (CAL) to strengthen Carlsberg’s position

in the Asian markets. In the important southeastern

Chinese market, however, CAL met fierce competition,

and earnings and sales did not take off as expected.

In 2003, Anheuser-Busch, SABMiller, Interbrew and

Heineken together held a substantial proportion of

shares in China’s four largest breweries, and controlled

more than 30 percent of the Chinese beer market in

collaboration with their partners. Furthermore, as time

passed, disagreements between Carlsberg and Chang

Beverages arose, which eventually led to Carlsberg pulling

out of the joint venture in 2003. However, as this  move was allegedly a violation of the contract between

the two partners, Carlsberg was forced to pay compensation

of kr734 million. As a result of this episode,

Carlsberg not only experienced severe financial losses

but also lost three strategically important years in which

to establish itself in the Chinese and Asian beer markets.

During these years, other international competitors

acquired important market share in the southeast

Chinese beer market, while Carlsberg, with its assets

first tied up in Thailand and later finding itself financially

strained from the lawsuit, was unable to muster

the financial strength needed to acquire new production

facilities and enter the competition.

This significant setback inhibited Carlsberg from

taking part in the initial consolidation process in southeast

China, which caused the company to revise its strategy

for Asia and the Chinese market. The result was a

focus on the highly fragmented, poor Western Chinese

provinces. “Our strategy is to pursue the provinces in the

west, as we can buy cheap and because it is a foundation

for growth,” explained Carlsberg’s information officer,

Margrete Skov. She continued, “The good forecasts for

growth are a result of China’s ‘go west’ policy with large

investments in the provinces in the west. That gives a

larger economy and better sale opportunities.”14

The cornerstone of Carlsberg’s new strategy was a

focus on achieving leadership and first-mover advantages

in Western China, while avoiding the fierce competition

in the southeast. Geographically, the Western

Chinese region included five provinces, which covered

one-third of China and had a population of around 100

million. The Western regions were the poorest parts of

China, and the living standards and level of beer consumption

were lower than the country averages. In the

Western province of Yunnan, for instance, yearly beer

consumption per capita only amounted to four liters, in

contrast to 70-90 liters in the big eastern cities.

Nevertheless, Carlsberg expected living standards

and beer consumption to rise rapidly. According to

Michael Fredskov Christiansen, director of the Chinese

operations, it was crucial for the company to be present

in Western China when growth accelerated. He

expected Carlsberg’s turnover to rise in line with the

general growth in the Chinese beer market.15 In addition,

the Western Chinese market was quite fragmented, and

none of the other large players were present, as they all

concentrated on the southeast.

Carlsberg’s 2007 Annual Report indicated that the

company’s strategy was “to build up a leading position

in these emerging markets through acquisitions and

subsequent strong organic growth, so that Asia makes

a greater contribution to Carlsberg’s overall earnings in

the future.”16

In 2007, Carlsberg had operations in 20 brewery

plants and had 4,756 employees in China. Only a handful

of the Chinese breweries were fully owned by Carlsberg,

while the rest were operated through joint ventures

with local partners, the Danish Industrialization Fund

for Developing Countries (IFU), and local authorities.

These efforts gave Carlsberg an overall market share

of approximately 55–60 percent in Western China,

making it the only international brewery with a leading

position in that region. In addition to selling local

brands, Carlsberg experienced increasing success with

Carlsberg Chill, a brand designed for the Chinese market.

This beer targeted the more exclusive segments

and was distributed not only in Western China but

also in the east. In this respect, Jørgen Buhl Rasmussen

argued, “We are interested in approaching nearby areas

by continuously moving from the west towards central

China — for instance through acquisitions.” However,

he also stated, “alone in Western China, the possibilities

are enormous. We control approximately 60 percent of

[the] Western China [beer market] in an area of a population

of approximately 120 million. That is far more

than Great Britain and Scandinavia together, and it is

a market where the consumers continuously buy better,

more expensive beer.”17

Even though the Asian investments had yet to show

their full potential, former CEO Niels Smedegaard

Andersen emphasized, “We are in China to create a position.

And we are not counting on making money in perhaps five

to 10 years. Carlsberg has to establish new markets.” He

also argued, “We consider Western Europe to be a mature,

stagnating market. Russia and Eastern Europe are growth

markets, while Asia is a developing market.”18

Considering Carlsberg’s activities in emerging markets,

CEO Jørgen Buhl Rasmussen was optimistic. He

was convinced that the company’s timely and successful

emerging market strategy and positioning had ensured

that Carlsberg was prepared to successfully capitalize

on its investments in the emerging economies. However,

Rasmussen was fully aware that the majority of the

company’s revenue was still generated in the stagnating

Western European markets and that new sources of revenue

were needed. At the same time, the BBH success

story was likely to soon be affected by ever-fiercer competition,

and the Russian government was contemplating

worrisome taxation proposals for alcohol in general and

beer in particular, which could seriously challenge the

profitability of Carlsberg’s Russian operations. Moreover,

despite magnificent forecasts for the Asian markets, the annual consumption per capita was still humble and had

yet to take off.

Therefore, Carlsberg’s shareholders would need time

and patience if they wished to see whether Carlsberg’s

emerging market strategy would suffice as a response to

the operational, competitive and regulatory challenges

that these markets posed. In the longer term, the payoff

could be significant.

Please answer in complete clear sentences

1. Besides increased market size, what was the other reason Carlsberg went international? .

2. Speculate why African markets were of limited interest to Carlsberg (pg. C-50) and was this a mistake? (the book does not suggest reasons, must reason on your own – hint liability of foreignness)

3. What type of entry mode did Carlsberg use and how does this relate to risk and control?

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