I'm still operating out of the European offices of Portfolio Guru, LLC this summer, and it's a pleasure to read European corporate earnings reports while most Real Money readers are still asleep. I wrote about BHP Billiton (BHP) (an Australian company, but with a London listing) and today saw the release of Carlsberg Group's (CABGY) figures. I am naturally inclined to pay attention to Carlsberg, because, in the spirit of full disclosure, I must admit that it's my favorite beer.
Love of the suds aside, Carlsberg's numbers were disappointing to analysts, and the shares fell more than 4% in this morning's trading in Copenhagen. Carlsberg CEO Cees 't Hart noted that profit growth (Carlsberg uses organic operating profit growth as a key performance indicator) would average about 1% in the second half, after growing 8% in the first half of 2016. Currency is a major driver, as the group now expects a 600 million DKK headwind from foreign exchange for full year 2016, with much of that damage coming due to the weakening Russian Ruble.
Overall, though, Carlsberg's results pointed to sluggish end markets, with pronounced weakness in Russia and Eastern Europe. Russia represented 16% of Carlsberg's operating profit in the first half, and that country's economic malaise is more pronounced than Western financial reporting would suggest. Reading the U.S. media, one is bombarded with stories of Putin's machinations in Ukraine, Syria, Iran and elsewhere, but there really isn't much reporting on Russia itself. Russia's GDP contracted 0.6% in the second quarter, the sixth consecutive quarter of contraction -- and that is a huge negative for Carlsberg.
Carlsberg's beer volumes fell 2% in Western Europe in the first half, and 4% in Asia, so it's clear that Russia is not the only problem for the company. Overall, revenue rose in each geography as price and mix improved, and clearly Carlsberg is looking to maximize profit per liter of beer brewed, which is a sensible strategy. Focusing on higher-end brands and rationalizing distribution accounts for Carlsberg's ability to grow revenue despite foregoing market share, but it still leaves one question unanswered:
Why aren't people drinking more good beer?
To me, it's just another symptom of the slowing growth pattern that is endemic to the world economy in 2016. Stagnation is everywhere -- including the U.S., with its 1% growth in the first half of the year, though America is not a significant market for Carlsberg - and markets that should be growing quickly are not. The beer market in China declined 6% in the first half, according to Carlsberg's industry data. That's a worrisome sign, and I think I may have to begin using the Beer Indicator as a corollary to the Big Mac indicator (which really measures purchasing power) that is oft-quoted by the press.
So, you can follow data such as retail sales, CPI, PPI, etc., that are reported by the world's various government agencies, and I'll just keep following the suds. Until the beer market starts frothing again, I can't be terribly optimistic about the global consumer. And I will continue to invest accordingly.