Cees ‘t Hart tells whether Russia will stay the largest market of Carlsberg, is pleased with slight regulation changes and shares his expectations on world beer industry development.
Interview: Cees ‘t Hart, President and CEO, Carlsberg Group
Born on 8 August 1958 in Rotterdam. In 1984 graduated from Leiden University as MA Social Science.
1984 Started his career as a HR trainee at Unilever.
1993 Business Unit Director Foods (Unilever), Hungary, since 1998 CEO in Poland.
2002 CEO Lever Fabergé, 2006 - Senior Vice President Marketing Operations Foods Europe.
2008 CEO, Royal FrieslandCampina, dairy
2015 President & CEO, Carlsberg A/S
CEO of Carlsberg Group Cees ‘t Hart joined the brewing industry after seven years of work in the dairy business. At a new job he faced the strong legislative regulation, especially in Russia where screws have been tightened for the last 10 years. The beer volumes have been dropping, and one of the latest restrictions – PET ban - caused the company market share decrease: from 34.5% at the end of last year to 32.1% in October 2017. Nevertheless Carlsberg Group is a leader.
Lately there has been progress in the dialogue with the Russian government – at least the officials promised not to increase excise burden on the beer business.
- You have been working in the brewing business for over 2 years. How different this business is in comparison with the dairy business?
- Each category has its own regulations, the beer admittedly has more regulations. I think the regulations can be good as long as they are persistent and predictable. As long as there is a level playing field, everybody is treated in the same way, it’s controlled in the right way and changes are communicated and discussed with us before they are implemented. I think this is something we can really deal with.
- How do you evaluate the legislation in Russia? Have you felt any changes during the last two years?
- The Russian market is very regulated in comparison with other countries in the world. What is appreciated is that the coming changes now are being discussed with us, with industry, before they are implemented. Obviously, a big impact on the market was the ban of PET packaging over 1.5 liter. Over the last few years we had a good discussion with the government on this. So the industry knew what was coming and could prepare for that. But these kinds of changes do have impact on the business.
- This story especially with PET-packaging faced a very vivid discussion in Russia and the industry did now always what will be the next step.
- True. As I think, it was good to have this kind of discussion with the government, so that they could understand what it would have meant to ban total PET segment.
- Maybe now you feel that you have to spend fewer efforts for such battles? Maybe now the communication with state officials goes more smoothly?
- I am only for two years in this business. I am vising Russia regularly and I’ve been several times in the FIAC, I’ve been in the meeting with president Putin in St. Pete Economic Forum. And as you can see there is a dialogue, the dialogue was always good. Obviously you don’t need to agree always but at least those parties are open for mutual arguments.
- How do you evaluate your last October meeting with the Russian officials?
- Under the FIAC I and around 30 leaders of big international companies met with Prime-Minister Medvedev and the full cabinet of ministers. It was intense two hours with many questions, very well prepared, and therefore the ministers were able to answer as well.
- What was your main question to the government?
- My main ask was to have transparent and predictable “rules of the game” and that changes should be discussed with the business so that we would be able to understand what was coming. As for my main question, it was about the excise development for beer. The excise increases over last few years have led too many negative changes in the brewing industry. We’ve lost almost 85 thousand jobs in the beer business and adjacent categories. And the revenues of the government did not get 110 billion roubles of revenues. So at the end the increase turn into really negative development of the state income.
- What was the answer?
- The answer was from the Minister of Finance [Anton Siluanov] that three-year plan to freeze beer excise would be kept intact, so that mean that it would not be an excise increase.
Power of the Golden Triangle
- After the introduction of PET ban Carlsberg has increased prices for its products to retain the value market share of the company while its volume market share decreased.
- Yes, our volume market share decreased. But again we were looking at the value of that segment, we are having quite a lot of value prepositions in that segment. We will continue the development of that. But we obviously want to regain the market share as well.
Within Carlsberg we have introduced the concept which is called the Golden Triangle. And there we look at the balance of the volume, the gross margin and the profit. And in each of our countries, the heads of the countries need to balance these three. And the same for Russia.
|“For us being number one or number two is more important than being number one in the world”|
- Aren’t you afraid of InBev and Efes merger, are you?
- Carlsberg is now number one in the Russian market by volume and value. There’s another strong number two now but we want to remain to be number one keeping that balance of the Golden Triangle.
- Carlsberg Group’s P&L shows that the company still strongly depends on the rouble fluctuations. By 2014 results the Russian market took 40% of EBITDA and after devaluation is dropped down to 20% and then to 16%. In first half of 2017 rouble experienced strengthening which led to the growth of the Group revenue. Have you developed any strategy to mitigate this dependence on the Russian market?
- This is the same with the exchange rate in Vietnam, in China, in Malaysia, the euro and so forth. So exchange rates are a fact of life, a fact of business. So we all see that we over time has became more diversified than in late 2000s when Russia accounted for a half of our business. Which means that we are not that depending on the strengthen or weakness of the rouble anymore. But obviously it’s always better that the rubble strengthens than weakens. For you as well I guess.
Beer for Teetotallers
- Returning to the predictable “rules of the game”: the legislators discussed the probable prohibition of advertising of non-alcoholic beer. For Baltika this is a growing segment, for many other companies as well. At the same time this segment in the companies and in the market is quite small.
- Globally we see that non-alcoholic beer is coming up. There are a lot of millennials, i.e. born between 1981 and 1995, that are choosing for non-alcoholic beer. So we think it’s good to support that segment in the market. And therefore we think that is wrong to ban an advertising of non-alcohol beer. As you know, Carlsberg stands as well for zero irresponsible drinking. And for that non-alcoholic beer is part of the solution – not of the problem. So we give this nonalcoholic beer, with our brands more opportunities to drink in a responsible way. So we feel it’s a good thing to support.
- But this is a beer advertising. You do not create a separate brand but use the umbrella brand – Tuborg, Baltika…
- We are not advertising Baltika or Tuborg, we are advertising Baltika 0, Tuborg 0. We try to get consumers that enjoy Baltika or Tuborg to also enjoy the zero option. Otherwise, we need to say that this is an non-alcoholic beer but people don’t know this beer, have no reference like about Tuborg and they hardly move to the zero option. This is the only country in the world where we have this discussion, frankly. In other countries governments appreciate that we come with this nonalcohol variety.
- Does it mean that while drinking Baltika 0 a person will transfer to other Baltika varieties?
- No. Because you have chosen for beer not for nonalcoholic beer as an entry of the market. So at the moment when they drank beer and around have alcohol-free option they go to brand which they already understand, which they know the taste is good and they trust the brand as well.
- Non-alcoholic beer development - is it only the Russian story or a global trend?
- In many of the markets it’s double-digit growth. In Spain the market segment is 15 per cent. And in most of the other European countries that’s 2 per cent and growing fast.
- Does it happen because of millennials or are there any other reasons?
- Millennials as well. More people want to consider how much they drink during an evening, drinking and driving, there is a more positive attitude towards responsible intake. Many people use non-alcoholic beer after sports.
- Do you believe that at a certain moment in the future people will drink only non-alcoholic beer?
- I don’t think so.
- When you look at the history, I think it was in 3 thousand BC there was dairy and beer actually started to grow. And for people let’s say to have a bit of alcohol at the end of the day to relax, it helps. It’s for many people celebration as well, have fun with friends In a kind of relaxed environment. And moderate consumption of alcohol helps in that. And I am convinced that in the total beer market there is an alcohol free beer do have a higher potential. And could even lead to growth of the total market. Because people start to drink less CSDs. Non-alcoholic beer is an essence is a healthy drink. And it’s sometimes a bit boring to only drink water.
- How big can be non-alcohol beer consumption in Russia in the future?
- Oh, it’s difficult to forecast. I think that changed a lot as the technology has helped us if you like to really make a good brew. Especially in Russia we have a special technology: we first brew the beer and then take out the alcohol. Which is more expensive but delivers better products. So if we taste some of our products non-branded people don’t fell or don’t taste the difference or find difficult to taste the differences. We can’t afford that in all countries, in Russia we do.
World beer market
Largest beer producers in the world – 2016
|Sales, bln dal||Sales, bln USD|
- Is it because you do see a big potential here?
- We are really positive about the development of non-alcoholic beer. Though it’s difficult to forecast, especially in the Russian market.
- What about global market?
- We think that the development of craft, specialties and non-alcoholic beer will lead to the growing value in the market.
Closer to Consumer
- As for craft segment, what prospects does it have?
- Everywhere in the globe we see craft and specialties coming up, we see higher interest in beer. Well, we all see that consumers are more and more interested in more variety. And as you know we have a very broad portfolio of national and regional brands creating for that. So with alcohol-free beer, with specialties, with craft we offer more opportunities to consumers to enjoy and more choice.
- Last year you didn’t consider any acquisitions of craft breweries here in Russia. Have you plans changed ever since?
- At this moment of time we don’t think that we need craft breweries to be purchased in Russia. We focus on organic growth. Sometimes we enter into the partnership like with Brooklyn Breweries in order to purchase or build a craft brewery. To your point in UK we had a feel that we lacked local authentic craft brand and therefore we bought London Fields Brewery.
- Carlsberg’s competitors started very actively to develop their own bar under their own brands. Do you have similar ideas in order to completely control the supply chain from production to tap?
- We see it as in some countries is developing it like in the UK where Heineken has made an effort in investment. We focus on something else, we do want to improve the experience of our customers by our DraughtMaster. With that innovation we are able to be closer to our customer and give our customer an improved business. It might we have more of our brands on the tap of our customer.
- Could you please tell in more details what is DraughtMaster?
- As an order we deliver 30 or 50 liter steel caps. Here we offer 20 liters of PET. She is cleaning itself. Products we make fresh for 30 days. In a steel keg it’s only 7 days. So our customer always serve fresh beer. And that’s well that kegs only 20 liters. They can have more varieties on tap. Which means more choice for the consumer. But as well different margins for the customer.
- Do you have this technology all around the world including Russia?
- We have that technology, but we are now rolling it out in Western Europe as we speak. As you know the market of HoReCa and pubs is less developed, so the so-called on-trade is less developed in Russia. So we first roll it out in Denmark, we convert it and then we moved to other countries. In Russia we have another, more standardized, technology for the DIOT.
- As for DIOT segment, in your reporting Carlsberg as well as EFES announced that this is a perspective and growing channel. In your opinion, why this segment demonstrates such a growth and are you going to increase your investments into it?
- You see many outlets coming up in DIOT and entrepreneurs see it as an opportunity. It is specializing some outlets into beer, so taking it out of retail to a specialized shop. Again it creates more choice for the consumer. And the consumer has positive connotation about this because he thinks it’s fresher than in a bottle.
- And what about any investments?
We invest a lot in it. As a result we grew by 50 per cent last year.
- How we can see from the reporting, Asia grows rapidly and by EBITDA probably it will be comparable to Russia or will become even bigger?
- Asia is already bigger than Eastern Europe. Today in terms of profitability Western Europe is roughly 53 per cent. Eastern Europe -18 per cent, and the rest 29 per cent is Asia.
- And how this market will develop? What prospects do you see?
- We are positive about Asia. As you said Asia is not one country. So within Asia we almost focus on Vietnam, India and China. And there are different opportunities there. We see that Vietnam because of the demographics the beer market is still growing. We see the same in India, where beer market is growing and we have conversion from heavy liquids whisky towards beer. And China is more value game. Premiumization is growing further. And there are five big companies in China. Two of them are international and they have the western brands, which are really appreciated by Chinese consumers. So Kronenbourg, Carlsberg, Tuborg are growing quick leader.
- Do you consider any mergers or acquisitions in China because it is a perspective market?
- Well, the market might consolidate at the certain moment of time, but we are happy where we are, in the West China. We are focusing in the West.
- After the merger of InBev and SABMiller the biggest player appeared in the global market. What Carlsberg is going to do in this situation?
- I think in the beer world it’s of course good to be number one in the world like our competitor. But the most important thing is to be number one or number two in a country. So there’s some example: you can be number one while being number four in all the countries and still don’t make money. So being number one or number two is more important than being number one in the world.
- It is basically of the economics of the beer market. Normally in a country you need your own brewery. You need to produce there because beer doesn’t travel that much. Because of the cost, it’s an expensive root to market. And therefore you need to have a certain scale in order to make money. This comes in the cabinets, or the investments in pubs, these are huge investments you need for this scale. Having said that the merger has not changed the market shares in many countries.
- How do you see the beer market development in the next 10 years?
- I think, there will still some consolidation going on. As we discussed earlier I think especially in Western Europe and later on Asia, a craft, a specialty will grow. Which is good for the value of the category. I think there will be higher appreciation for non-alcoholic beer. Which will be good for the value but as well for the volume. And I think that the beer market via the alcohol free beer will bring as well some other so called soft brews – alcohol-free malt beverages. So I think innovation in coming years will be key. To remain relevant in the daily intake of fluids.
- You say there will be mergers. Will it be mergers of big companies or big companies will acquire small ones? Or we should expect any big deal similar to the one which happened last year?
It’s difficult to say. There’s always big companies have at the certain moment no possibility to consolidate further because of antitrust issues. So there are limitations with number of opportunities there.
Robot will not Replace Brew Master
- Well, we are a contemporary company with a lot of focus on research. We are satisfied with our group and set of our Carlsberg Laboratory where we indeed use advanced technologies in order to improve our products. It is crucial in choosing right row material, improving the barley. On the other hand brewing is a really a craftsmanship. So we don’t have any plan to replace our brew masters by robots or whatever.
Shareholders (according to December, 31, 2016): Carlsberg Foundation owns 30% of share capital what accounts for 75% of voices, the rest shares are in free circulation.
Capitalization – $17.7bn
In QI of 20017 the Carlsberg Group’s key performance indicators were:
- Net revenue: DKK 31.8bn ($4.6bn)
- Operating profit: DKK 2.3bn ($335.4mln)
- Beverage volumes (for 9 months of 2017): 104.9mln hectoliters sold, including 8.8mln of beer
Established in 1847 by brewer J.C. Jacobsen. The Carlsberg Group’s portfolio consists of 483 SKUs. In Russia, the company owns Baltika Breweries.
“Vedomosti”, November 13, 2017
Irina Sinitsina, Ekaterina Burlakova