Economic Factors

In addition, national trade legislation can affect the possibility to import cheap raw materials from elsewhere. Custom duties on aluminum, which the United States face since March 2018, might have severe consequences on the industry.

Inflation

In Western Europe, the inflation rate was on average 1,89 percent in 2017. The rate was especially high in the Baltics with over three percent. From 2014 to 2016, the rates were much lower, fluctuating between 0,31 and -0,05 percent. This shows that the money value has remained at a constant level in Western Europe. Inflation rates in Eastern Europe are on average much higher. Especially the Ukraine, with an inflation rate of 48,5 percent in 2015 as well as Russia and Belarus contribute to the high average rates. Inflation rates in Asia have been decreasing from around five to three percent within the last five years. Looking at the biggest markets, China’s rate fluctuates between 1 and 2 percent. In India, inflation was very strong in 2013 and 2014 but is declining now, ending at 2,5 percent inflation in 2017 (Euromonitor International, 2018)¹².

The high numbers of inflation in Eastern Europe and Asia show an increase in price levels or a decrease in money value. High levels of inflation therefore have a negative impact on the demand for beer as well as on the Group’s money value in the respective country.

Employment Rates

Employment rates not only serve as an indication of how well an economy is doing but also together with income rates determine or influence the level of consumption.

In general, the employment rates in 2017 were very high in all three regions. Data from Euromonitor International show an average employment rate in Western Europe of 68 percent. In Eastern Europe 67 percent of the population was employed and in Asia 70 percent (Euromonitor International, 2018)¹³.

Working Conditions

Although employment rates are at a high level, emerging and growing countries in Asia and Eastern Europe struggle with bad working conditions. These working conditions can expose the Group to risk of strikes, work stoppages and disruptions (Carlsberg prospectus, 2017).

Disposable Income

Additionally to the employment rates, beer consumption is strongly linked to per capita income. A high income generally means a higher consumption of alcoholic beverages and soft drinks (Carlsberg prospectus, 2017). We choose to take a closer look at disposable income, i.e. the income that is left after taxes, social security charges, cost of living etc. are deducted. Disposable income can therefore be considered as the “money that is left to spend”.

12 Development of rate of inflation in appendix 10

13 Development of the rate of employment in appendix 14

Overall, the total disposable income is increasing continuously in all regions. In sum, the disposable income in Western Europe was DKK 53 trillion in 2017 and has increased by 11 percent during last five years. The income per household in Western Europe is the highest of the three regions Carlsberg operates in. On average, a household in Western Europe had DKK 212.000 disposable income available in 2017. In the Eastern European countries, the disposable income per household is much lower than in Western Europe. On average around DKK 54.000 were available in each household in 2017. Asia not only has the strongest increase in total disposable income: During the last 5 years, disposable income increased by more than 42 percent. The disposable income per household in Asia was on average DKK 177.000 in 2017. However, data from Cambodia, Nepal, Laos and Myanmar are missing. Therefore, the data is most probably overestimated and an adjustment downwards would be appropriate. Households in countries such as Singapore and Hong Kong have a high amount of income left for consumption, on average around DKK 400.000 were available for consumption in each household (Euromonitor International, 2018)¹⁴.

Summing up, growing and high GDP rates as well as high employment and income levels in Asia create growth opportunities for the beer industry in this region. However, bad working conditions and high inflation rates bring along challenges. Eastern Europe is characterized by very challenging economic conditions. Low income levels and employment rates compared to the other two regions provide low opportunity of favorable developments of demand and high inflation and negative GDP rates create unstable market conditions. In Western Europe, economic conditions are at a very stable and high level. Consequently, the risk of challenges from an economic perspective is very low but there is also only small potential for growth.

Foreign Exchange Rate

The Group is operating in more than 150 countries and many of the company’s assets, liabilities, revenues and expenses are denominated in a different currency. Fluctuations in these currencies can strongly influence the Group’s income statement. Therefore, highly volatile currencies (such as the Eastern European ones) expose businesses to high risks. However, in 2017, the Russian Ruble was appreciated, i.e. the foreign exchange rate increased by 11,3 percent, which had a positive impact on the operating profit. On the other side, the strong Danish Kroner led to a negative currency impact in Western Europe and Asia (Carlsberg annual report, 2017).

14 Development of total disposable income and disposable income per capita in appendix 11 and 12

Commodities

As mentioned in the chapter above, prices of raw materials can be influenced by the government but other factors outside of the company’s control can impact them as well. Examples are growing demand for other products that need the same raw materials. In the last years, the demand for biofuel has massively increased. Energy prices and water availability also play an important role (Carlsberg prospectus, 2017).

Environment

The weather strongly influences the performance of Carlsberg in different ways. Firstly, a bad summer in Europe has a negative impact on the consumers’ desire to drink beer. Carlsberg justifies the unsatisfactory financial performance in the third quarter of 2017 with the rainy and cold summer in parts of Europe (Carlsberg annual report 2017). In the future, a very cold spring or bad summers might again reduce the demand for beer.

In Asia, environmental disasters, such as floods or tsunamis occur frequently and can have a huge impact on the economic situation of a region. Thereby, demand for beer is influenced (Carlsberg annual report, 2017).

Secondly, not only the demand is affected by climatic conditions but also the crop of raw materials such as barley and hops. Frost or droughts can reduce supply and increase prices and thereby affect Carlsberg’s cash flow (Carlsberg prospectus, 2017).