January 14, 2005

Talk with Carlsberg CEO Nils Andersen

Nils S. Andersen, CEO Carlsberg (photo: Jerry Bergmann)
Nils Andersen: "I don't see myself as a tough guy"
From his office in the historic brewing tower at the headquarters of Carlsberg Breweries A/S in Copenhagen, CEO Nils S. Andersen can look over the Öresund strait to the coast of nearby Sweden.

Perhaps it is not without significance that his room faces east towards the new demand for premium beer in traditionally vodka-loving Russia.

This modest, polite man at the helm of the world's fifth-largest brewer can afford to make a long-term commitment to developing premium brands without short-term shareholder pressure. Carlsberg is majority owned by a charitably-minded foundation.

The world being as it is, however, this doesn't mean that 47-year-old Nielsen, dubbed "the hatchet" by his critics, doesn't have to take some very tough decisions...

INTERVIEW


Mr. Andersen, where does Carlsberg see the strategic balance between regional and global brands?


We see them as catering for two partly different consumer types on two partly different markets and for at least two different consumption situations. We think that an international brand works best when it is supported by strong local brands.

The local brand will be the big volume brand, and the international brand will be the premium product for certain occasions and certain people. Together they achieve economies of scale and produce high margins.

So usually we try to acquire the leading brand in the region we wish to enter and then add Carlsberg on top. That's the winning formula.

Why then do you market yourself, for instance, in Italy as Carlsberg Italy rather than using a regional brand name?  

Because we don't own a strong local brand there. Usually, however, a strong local brand name is better known and loved in the local region than the international brand.  

Successful beer brands are emotional. What emotion do you put into the international Carlsberg label?  

The working title of our international marketing slogan "Probably the best beer in the world" is "Drink with a World of Friends". When consumers drink Carlsberg they become part of a global cosmopolitan village inhabited by open-minded people without racism or prejudice.

This is the type of world I want to belong to and should like my children to live in. I think this is both a very positive emotion and part of a big trend towards increasing global integration.  

Many young people consider beer the drink of their grandfathers and prefer alcoholic mixed drinks in bars, trendy pubs and discos. If they drink beer at all, they turn to more "exotic" brands such as Foster's, Corona or Kilkenny. Does it concern you that a traditional beer brand like Carlsberg isn't considered chic and trendy by the young?  

Carlsberg is outgrowing all the brands you mention and with young people in new markets.

In some traditional markets there are some young people who consider beer a drink of their grandfathers, but in general the trend is towards premium beer products in most of the markets where we work.  

You have been criticised for not reacting to the increasing strength of cheap beers. Why have you always refused to make them?  

We also offer lower-priced beers in some markets, but it is not part of our strategy. We invest a lot of research money in our Carlsberg laboratories because we are convinced that quality matters.  

How is this reflected in your price positioning?  

In general, we try to place Carlsberg at 20 per cent over the leading standard brands. To date, we have found no market where we could grow faster by selling cheap.

In spite of the price premium, Carlsberg is both the fastest growing brand in our portfolio and the fastest growing international brand. So there are enough consumers in the world who appreciate quality and are prepared to pay for it even if this is only on certain occasions.  

Why have you never used the strength of the Carlsberg label in the non-alcoholic beer segment?  

We are one of the leading brewers of non-alcoholic beers world-wide. We own Feldschlösschen in Switzerland who also produce Moussy, the leading brand in the Moslem world. But we are convinced of the need for Carlsberg to have a clear positioning.

We want Carlsberg to be an easily understandable top-quality beer and refrain from any marketing which would confuse our message.

Are you worried when fitness and health conscious consumers turn increasingly to mineral water that you sell a high-caloric product?

There are certain occasions where one cares more about calories and others where one cares less about them. In fact, beer has fewer calories than red wine and the same number of calories as milk or orange juice. Beer is therefore not problematic as a drink per se.

We talk about beer bellies, but it is just as well a matter of people not eating the right food.  

Does drunken delinquency at, for example, football matches concern you?  

We firmly believe that moderate consumption adds to the quality of life and that the most important thing in this context is the dialogue between parents and children.

However, as manufacturers we have to live up to our responsibility of selling a product which, when consumed in excess, can damage one's health and social behaviour.

We have therefore spent a considerable amount of money on informing consumers and were one of the first to put relevant information on beer labels.

For the last 20-odd years we have informed consumers about the alcohol content in the blood after drinking our products, how much is good for you per day etc. We are also in contact with leading brewers in order to develop such measures in Germany.  

How do you react to criticism that Carlsberg is more interested in the promotion of the Arts and Sciences than in maximising profit?  

You must differentiate between the owners of Carlsberg and the company itself. We run the Group as professionally as possible in order to maximise growth, profit, return on equity and assets as well as the dividend.

51 per cent of the dividend payout goes to the Carlsberg Foundation which spends one third on the Arts and two-thirds for scientific research. As a CEO, I'm very comfortable with having majority owners who spend their money on making a positive contribution to society.

Isn't there a risk that the Foundation doesn't take enough interest in the business?  

I can assure you that this is not the case. However, a foundation structure puts greater responsibility on the management for putting cases clearly and driving change.  

Your ownership structure doesn't make for much upside on the share price from a speculative point of view.  

That's fair criticism, but analysts have always known this. Also, one should not rule out that the foundation might one day decide on broader consolidation although there is nothing to indicate this to date. In any event, we are protected from speculative or hostile takeovers.  

How difficult is it to raise money for major international acquisitions via the owner, i.e., via the Foundation?  

We spent €2bn buying out Orkla and €400m on Holsten, which increased our indebtedness to 33bn Danish krone.

By the end of 2004, this was down to around 22bn krone, but quite a lot of the Boards of public limited companies would have been reluctant to finance such a risk. This is clear evidence of the entrepreneurial spirit of the foundation.  

Will you be making any major acquisitions in the near future?  

No. Even prior to Orkla and Holsten, we had made a number of international acquisitions over the last few years including Feldschlösschen. Given our present capital structure, it's not possible for us to simply go out and do big things.  

To what extent have the recent international mergers and takeovers of your major competitors put you under pressure?

These mega-deals will not put us under pressure short-term and mid-term because most of them do not affect our core markets. However, long-term they will probably require us to work even harder and to be very stringent regarding which regions we work in.  

Why do the USA and Latin America figure so little in your international strategy?  

As little as five years ago, we only generated real cash-flow in Denmark, Malaysia, the UK and Portugal. Since then, we have become a leading player in western Europe, no. 1 in eastern Europe, and are building our position in Asia, but it was too late to enter North and South America in any meaningful way.  

In what region of the world are you achieving the fastest growth?  

Eastern Europe, including Russia, is currently our strongest growth engine, and, together with our joint-venture partners Scottish & Newcastle, we are market leader in the former Soviet Union.

Currently three-quarters of your annual sales are in western Europe, a fifth in eastern Europe and only 5 per cent in Asia. Are you happy with that mix regarding the relative growth potential in these regions?  

We are trying to consolidate our position in western Europe in order to maximise cashflow and earnings so that we can invest as much as we can in eastern Europe and Asia.  

Why then did you buy Holsten?  

We bought it for the same reason that we bought Feldschlösschen, namely, we thought that we could get a good cashflow out of it pretty quickly.  

In western Europe beer consumption is stagnant. How can this be counteracted?  

I don't think that one can resist major trends in a very big way. You have to accept them and look for other possibilities.

For instance, if people drink less on fewer occasions there still remain marketing opportunities for selling higher quality products to them for those occasions.

In Europe as a whole we expect beer consumption and our cash-flow to be stable over the next ten years. We are not in a German situation, where we reckon with automatic decreases every year, and expect both the premium and the low-price segments to grow in the region.

Against this background we shall continue to optimise value within the premium segment and to take cost out of our systems. This will require further rationalisation and more technical investment.  

What went wrong at Hannen when you first entered Germany?  

Hannen was already declining pretty fast as an "Altbier" brand when we took it over.

We also entered the North Rhine-Westphalia region, where beer prices were very low, and a national market where the premium segment was the most price-competitive of all. So we didn't find it very easy to build up our position.

However, it was the regulation of cans which really killed off Hannen as a business concept. When we originally entered Germany we aimed to consolidate the market and build up our international brands.

We soon found that we were the only ones trying to make a major contribution to the consolidation of the market and couldn't see any profitability in doing so alone.

Why then did you decide to re-enter Germany via the purchase of Holsten?  

In the interim, a number of major international players have entered Germany in a big way. We now believe that the market will consolidate and regain profitability in maybe five to ten years, but not 20 to 30 years.

We also still believe that regional brands have a strong role to play. And, contrary perhaps to our strategy ten years ago, we now have a clear strategy regarding local and regional brands.

The Holsten acquisition fits this very well: the Holsten brand is leader in northern Germany, Lübz is leader in Mecklenburg-Western Pomerania, and Feldschlösschen is leader in the greater Dresden area.  

Why did youdispose of the crown jewels by selling König Pilsener?  

König may have looked like a crown jewel to some, but it isn't a leader in its home region and has only a 2 per cent share of the national market. Thus it did not fit our strategy of clear local market leadership.

Are you interested in buying Krombacher or Warsteiner?  

We would look at any available acquisition or partnership in Germany, and there are a few that could be potentially interesting, but any such deal would have to give us a clear leadership position either regionally or nationally.

That said, we did not re-enter Germany with the aim of creating a national presence and do not judge ourselves by the number of hectolitres of Carlsberg we sell short-term. We did so with the aim of creating a sustainable regional presence.

Therefore, our first priority is to invest in and build up the German brands we have acquired.  

Aren't you far away from achieving your ROIC goal of 7 per cent by 2006 "at the latest"?  

It's still early days yet, but we exceeded our expectations for 2004 despite a relatively difficult market development.

Not only our restructuring plans are going well, we also see some interesting possibilities for the brands including some significant synergies with our UK operations.

To date, we've invested €400m of capital employed in Holsten, which means that we have to generate EBITA of around €30m in 2006. We are confident that we shall achieve this.

You are known as a hard rationalisation manager who doesn't flinch when it comes to closing breweries. Is this tough guy image the full story regarding your management style?  

Personally, I don't consider myself a tough guy, and I don't think people who know me think I am. But, of course, Carlsberg was in need of rationalisation, and running a western European brewing company means that you have to be aware of your cost situation all the time.

My ambition for Carlsberg was and is to accelerate growth. We have invested all rationalisation savings into brand development, acquisitions and in the development of our people.

 
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 2, 14.01.2005


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