Political and Legal Factors

This chapter will analyze major political and legal factors that have affected Carlsberg’s profitability in the past or that might affect future performance.

In general, Carlsberg’s operations are subject to several national and international laws regarding advertisement and sales, packaging, trade or tax regulations. A failure to comply with these regulations can result in negative publicity, penalties, cancellation or suspension of Carlsberg’s licenses, permits or approvals (Carlsberg prospectus, 2017).

The level of regulation can be influenced by the development of the public perception of alcohol and soft drink consumption (Carlsberg prospectus, 2017). During recent years, governments have shown a strong interest in influencing the consumption of beer due to health and security issues such as accidents or domestic violence. The European Union (EU) for example introduced the ‘Alcohol Harm Reduction Strategy’ and encourages nationwide actions against harmful alcohol consumption.

These national initiatives contain restrictions on marketing, selling or consuming alcohol and increased taxes but also nationwide media campaigns educating about harmful effects of alcohol consumption. Therefore, they influence sales as well as the image of Carlsberg (Commission of the European communities, 2006).

National Campaigns against Alcohol Consumption

Education and awareness campaigns promoting moderate consumption and informing about impact on health through different forms of media or with support from schools, doctors etc. are conducted on a regular basis in many of the countries Carlsberg operates in (Commission of the European communities, 2006).

In 2017 for example, an awareness week on alcohol related harm was organized by the WHO in the EU, offering different public events, e.g. presentations, conferences or debates (AWARH homepage). These educational campaigns and especially the association with traffic accidents or violence put a negative image on the alcohol industry which duplicates on Carlsberg’s brand image and might decrease the demand for beer.

Advertisement Regulations

Several countries restricted or banned marketing channels for alcoholic beverages. Some countries, e.g. Norway, Sweden or Russia banned advertisement for alcoholic beverages on most media, including television, cinemas, billboards or newspapers. Other countries, e.g. Estonia, Finland or Malaysia limit the advertisement to specific times at night and in some countries, e.g. Thailand, advertisement must contain a warning message. In Denmark, the youth protection policy prohibits

advertisements to be directed towards young people (European Centre for Monitoring Alcohol Marketing, 2018).

The monitoring activities today are especially high in Europe. In Asia however, there is still a lot of potential for governments to get involved and restrict marketing and advertising activities of Carlsberg in the future. Especially in countries or regions in which Carlsberg is not yet well-known, advertisement is highly important and bans might influence the success tremendously.

Restrictions on Sales and Availability

Other governmental activities aim at reducing the alcohol consumption by restricting sales of alcoholic beverages. Some countries, such as Norway, Germany or Singapore for example, prohibit the sale of alcoholic beverages after a certain time at night or on weekends or holidays. In Sweden and Norway, drinks with a higher content of alcohol than 4,7 percent can only be bought in special liquor shops. In 2013, beer was reclassified from foodstuff to alcoholic drink in Russia so that legal restrictions on the retailing of alcohol applied to beer as well. Subsequently, the availability of beer in kiosks and other non-stationary places was limited and beer sales were banned everywhere from 11 pm to 8 am excluding bars, cafes and nightclubs (Euromonitor International, 2016A). Age restrictions further decrease the availability for customers (European Centre for Monitoring Alcohol Marketing, 2018).

The regulations regarding the availability of beer limit the Group’s sales. Since these regulations were all established or tightened during the last years, further strengthening of laws and regulations regarding the consumption of alcohol is highly possible.

Taxes

Excise duties increase prices and thereby heavily influence the behavior of consumers.

Consequently, an absolute or relative (compared to substitutes) increase of taxes can have a strong adverse impact on the economy (EY, 2014).

Several countries have increased excise duties in the last years or will increase taxes in the future (Euromonitor International, 2016A). Russia increased excise duties to restrict alcohol consumption by 200 percent in 2010. The tax was further increased by 11 to 25 percent each year until 2016 (Carlsberg annual reports, 2010-2016). The Finnish government announced in November 2017 that taxes on beers are to be increased by 10,6 percent and for cider by 12,7 percent in 2018.

Consequently, retail prices of beer will be on average five percent higher than they are right now (Helsinkitimes, 2017).

Not only changes in the taxation of beer influence Carlsberg’s industry but also the taxation of wine and spirits matter as they are considered as substitutes in the market.

In most of the European countries, beer is stronger taxed than wine so that wine is likely to be used as a substitute for beer. Countries such as Germany or Italy do not take excise duties on wine at all.

Only in the Nordic countries and the UK, wine is higher taxed than beer so that an increase in taxes for beer does not have that big of an influence (European Commission, 2018)⁹. Taxes on beer in Asia however, are comparably low and also much lower than taxes on wine (Preece, 2012).

Besides excise tax, the industry always faces a possible increase in VAT, corporate income tax, transfer pricing regulations, repatriation of dividends and capital etc. from local, national or foreign authorities (Carlsberg prospectus, 2017).

Overall, these legislative changes including restrictions in advertisement and sales as well increased excise duty rates aiming towards reduced beer consumption were especially strong in Russia during the last years. As Russia is a huge market for Carlsberg, the newly introduced laws and rules had a significantly negative impact on the company’s global performance (Carlsberg annual report, 2017).

In Asia, the consideration of health issues is not as prominent as in Europe. Therefore, excise taxes and educational campaigns do not influence the industry as much yet. However, for religious reasons, many countries restrict the advertisement and consumption of alcohol as well.

Packaging Regulations

During the last years, several nationwide packaging regulations have influenced the operations of Carlsberg (Carlsberg annual report, 2017).

Examples are bans of glass bottles in city centers or during events. Russia banned PET bottles above 1,5 liters in 2017 (Carlsberg annual report, 2017). This ban massively reduced the beer consumption in Russia as beer became less affordable (Euromonitor International, 2016A). PET as a cheaper form of packaging dominated the Russian market. Brewer’s Union estimated that 42 percent of all beer is sold in PET bottles (CNN, 2017).

Risk of Litigation

The beverage industry is also exposed to a risk of class action or other forms of litigation, for example in cases of accidents where excessive consumption of beer was involved. Similarly, soft drinks can be litigated due to health issues. Litigations can result in fines as well as reputational damage.

Litigation can also be related to competition law infringements (Carlsberg prospectus, 2017).

9 Overview of excise tax for beer and wine in appendix 7

Monopolies Legislation

The enormous size of Carlsberg and its leading position in many of the operating markets makes the company subject to competition laws which can influence the company, i.e. slow down its growth plans by restricting further acquisitions and expansions (Carlsberg prospectus, 2017).

Carlsberg currently faces a EUR 62 million fine for alleged infringement of the competition rules in 2007 by the Federal Cartel Office Germany. The management does not agree and has appealed the decision to the relevant German court (Carlsberg annual report, 2017).

Political Stability

Political stability can highly influence the economic situation of a country or region. If a country is very unstable, investments and the pace of economic development will be reduced. Carlsberg has significant operations in emerging markets in Asia and Eastern Europe. Here, Carlsberg faces challenges such as crime and lack of law enforcements, corruption, terrorism, political insurrection and changes in government policy (Carlsberg prospectus, 2017). The World Bank Group classifies Russia as one of the five markets to avoid doing business in (Euromonitor International, 2015A).

This is due to the unstable political environment, threats of terrorism and high corruption rates.

Further, the judicial branch is not considered independent (Euromonitor International, 2016A).

Another country mentioned in the report by the World Bank Group is Italy: Italy is amongst the least accessible markets due to very low labor market laws leading to overly stringent hiring and firing practices (Euromonitor International, 2015A). Corruption perception is very high compared to other European countries (Euromonitor International, 2016B)¹⁰.

Mostly in Europe, a rising number of refugees has led to controversial political debates and increasing popularity of right winged parties. Asian countries, for example India, are affected from the huge flow of refugees as well which might affect the political stability (Euromonitor, 2015B).

Commodities

Several raw materials are needed in the production and packaging of beer: Hops, barley, malt, glass, aluminum, other packaging materials as well as indirect materials (Carlsberg annual report 2017).

Prices of raw materials needed to produce beer might be influenced by national legislation, e.g. when affecting agriculture, generation of energy etc. (Carlsberg prospectus, 2017). Although the company uses forward contracts, price fluctuations might have material adverse effects on the Group’s business.

10 Corruption perception ranking in appendix 8

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.