Potential Effect of SAIL’22 on Carlsberg’s Future Performance

In Asia, the product portfolios are updated and now focus on international premium brands. As an example, Tuborg is launched in growth markets such as Vietnam, Cambodia and Laos (Carlsberg annual report, 2016). Additionally, channels in these growth as well as mature markets (e.g.

Malaysia, Singapore, Hong Kong) are expanded (Carlsberg corporate presentation, 2018).

The last strategic choice Create a Winning Culture comprises activities that foster team-based performance, contribute to a better society and ensures the application of codes and policies (Carlsberg annual report, 2016).

To foster one-team behavior and reward high level performance a new performance management system based on the triple-A concept (Alignment, Accountability and Action) is introduced. This concept is applied when measuring performance and assessing potential (Carlsberg annual report, 2016).

Additionally, Carlsberg cares for global challenges and thus contributes to a better society: The Group conducted a materiality assessment which results in a prioritization of the most important sustainability topics. Now, a decreasing consumption of water and energy, a reduced carbon footprint, promotion of responsible drinking and caring for health and safety are in focus. Measurable targets are set and force the implementation of activities (Carlsberg annual report, 2016).

Facilitation of awareness and compliance with all Group policies is maintained by rolling out a new Code of Ethics and Conduct (CoEC), translated into 27 languages (Carlsberg corporate presentation, 2018). To ensure the values of integrity, responsibility and honesty in the CoEC are implemented, an e-learning tool as well as a compass game are implemented (Carlsberg annual report, 2016). A so-called policy house is launched which is easily accessible and which encompasses company-specific and functional policies (Carlsberg corporate presentation, 2018).

Breaches of the CoEC and other policies can be reported anonymously through the new “speak up”

helpline that supports the Group’s whistleblower set-up (Carlsberg annual report, 2016).

Carlsberg did not face financial trouble. In fact, the company introduced SAIL’22 to become more competitive.

Secondly, the repetition of restructuring activities does not contribute to a successful restructuring operation. Carlsberg’s strategy is shaped by a history of restructuring initiatives. In 2003, the company implements the so-called Excellence Program targeted to Western Europe aiming to increase efficiency, control costs and optimize turnover growth. Carlsberg describes the program as successful as it improved the profitability of the company (Carlsberg annual report, 2003 and 2008).

In 2008, the next generation of the Excellence Program started aiming for further optimizations across the value chain (Carlsberg annual report, 2008) which translated 2010 in a more subtle business strategy which however still comprised the same aims within a different format (Carlsberg annual report, 2010). Furthermore, it can be determined that the objectives of the Group’s restructuring initiatives resemble one another however the content was adjusted according to the macro-economic as well as industry specific challenges of the company.

Moreover, the literature indicates that long lasting restructuring programs can lead to a loss of commitment in the restructuring activities by stakeholders. The duration of SAIL’22 can be characterized as long. While the literature described that restructuring is implemented within one to two years Carlsberg’s initiative lasts six years.

Additionally, the literature identifies cost retrenchment and downsizing as means that contribute to a successful restructuring. Both activities are undertaken during SAIL’22.

Furthermore, refocusing on the most profitable products can help the company to conduct a successful restructuring as operating performance as well as stock returns can be improved.

Carlsberg induces this mean in its strategy as well.

All in all, Carlsberg follows most success factors identified in the literature. However, the fact that the company has a track record of implementing restructuring programs incorporating all efficiency improvements and refocusing initiatives could contradict the Group’s aim to implement long lasting changes through SAIL’22 because the previous initiatives only contributed to short-term improvements while they aimed to increase long-term profitability.

In section 5.5.2 we emphasize that there is a need for Carlsberg to undertake the strategic review process SAIL’22 to mitigate internal weaknesses and overcome external threats while focusing on their strength. The previous section 5.5.3 gave us then an insight through which activities Carlsberg wants to mitigate the identified weaknesses and threats. Now, we want to assess which potential influence the SAIL’22 program may have on the company’s performance. With the execution of SAIL’22 Carlsberg follows the objective to deliver increased value for shareholders. Carlsberg highlights especially three performance measures which should be improved and which should

contribute to increased shareholder value. Firstly, Carlsberg aims to increase organic growth in operating profit through top-line growth and the right balance between volume market share, gross profit after logistics margin and operating profit. Secondly, Carlsberg aims to improve the ROIC and lastly the company wants to achieve an optimal capital allocation, meaning that the ratio NIBD to EBITDA is below 2.0x and the dividend pay-out ratio should amount to 50 percent.

The activities revitalize core beer and transform the business in Russia under the sub-initiative leverage the strongholds aim to boost revenue through updating existing products. Carlsberg uses its strength of having strong and well known core brands and increases marketing activities on these brands. Additionally, Carlsberg reacts to the loss in market share in Russia by implementing initiatives that transform the business in Russia. Nevertheless, it is hard to predict how successful the actions in Russia are going as the past showed that macro-economic factors have a huge influence on the business and the macro-economic conditions are hard to predict due to the political instability in Russia.

The development of categories like craft, specialties and non-alcoholic beer is a strategic choice which should lead to revenue growth as well. The focus on craft beer and specialties as well as non-alcoholic beer has proven successful with a volume growth of 29 and 15 percent respectively in 2017. Especially the focus on craft and specialties is worthwhile as it offers a bigger profit margin as core beer. Therefore, by supporting the growth of this category Carlsberg may foster organic growth in operating profit. Moreover, the extension of non-alcoholic product lines turns the threat of increasing health consciousness into an opportunity for Carlsberg. We believe that especially craft beer and specialty as well as non-alcoholic brews will account for a revenue boost in the next years as how in our strategic analysis determined the demand for this category is growing and by bringing the beer to the stores Carlsberg can use its existing distribution channels to flood the supermarkets with these products.

We identify Carlsberg’s limited geographic reach in comparison to its bigger competitors Heineken and AB InBev as a competitive disadvantage. Therefore, the SAIL’22 program reacts to this weakness by growing markets in Asia and targeting big cities. Particularly the presence in big cities promises increased returns as in our PEST analysis described urbanization increases and the alcohol consumption in cities exceeds the consumption rural areas. However, we believe that the successful launch in big cities is rather difficult as especially in big cities the competition is severe.

Not only other major players identify the revenue potential in big cities but also local brews and micro-breweries are present in the big cities. The same argument applies for Asia. The predicted rising beer consumption in the region makes the market not only attractive for Carlsberg but also a

number of competitors. However, with more than 68 billion liter beer consumption²⁸, Asia is the biggest market in the world. Therefore, it should be possible for Carlsberg to increase revenue in Asia.

Additional to the activities that pursue revenue growth, the company aims to become more competitive through efficiency optimization and cost saving programs which are executed under the sub-strategic choice Funding the Journey and Excel in Execution. Nonetheless the question arises how sustainable the cost savings will be in the future. As previously described Carlsberg has a track record of optimization and cost saving initiatives which go more than 10 years back. However, none of the initiatives allowed for long-term effects. Although we believe that Carlsberg will generate cost savings and create efficiency in its processes the question remains how sustainable these effects may be.

Overall, Carlsberg has identified the internal weaknesses and external threats it is facing and with the implementation of the strategic review process SAIL’22 the company intends to actively mitigate them. Therefore, the restructuring program has, if executed as planned, a positive effect on the company value. However, it is difficult to determine to which extent SAIL’22 will improve operating performance measures and the shareholder value in the long-term as previous projects with comparable objectives did not lead to a satisfying long-term effect.

28 Calculation of total beer consumption is Asia in appendix 25

6 Financial Statement Analysis

In this chapter, we will conduct a financial analysis. The aim of the analysis is the calculation of Carlsberg’s historical and current profitability. This helps us to gain an understanding of the effect the SAIL’22 restructuring initiative has on the Group’s profitability. Additionally, the financial analysis identifies financial drivers and thus serves as a basis for forecasting in chapter 7.

Before actually calculating the return from financing and operating activities, we first analyze the quality of accounting data provided by Carlsberg and prepare the financial statements for the analysis.