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Retail Amp Consumer
Drinks companies shaken by rouble turmoil
From the Financial Times of Sun, 21 Dec 2014 17:17:59 GMT
Carlsberg©Bloomberg

Economic turmoil in Russia could lead to double-digit downgrades at leading drinks companies as the collapse of the rouble causes havoc for businesses operating in the country.

International companies selling products such as clothes, drinks, cigarettes and furniture are struggling to keep costs down as the fall in value of the rouble makes imports more expensive. Instability in Russia has forced companies to raise prices, suspend sales and even cease trading in the country altogether.

Drinks companies are the most exposed non-financial businesses, according to Citi, with Russia accounting for more than 30 per cent of sales for both Carlsberg and Coca-Cola Hellenic, the world’s second-largest bottler of Coca-Cola.

Carlsberg, which has said it does not plan to pull out of Russia, has previously indicated that a one rouble swing against the euro could have a DKr100m (£10m) effect on forecast operating profits.

The collapse in value of the rouble in December could therefore hit Carlsberg’s full-year results by as much as a third, according to Andrew Holland, drinks analyst at Société Générale.

But daily swings in the currency have made it difficult to predict the final impact, he added.

Mr Holland said he would not be changing his forecasts for the company, which has issued two profit warnings this year, until there was greater stability in the Russian currency.

The falling value of the rouble has a twofold effect on companies operating in Russia. Sales numbers are hit when they are translated into other currencies and the cost of buying goods from outside the country also rises due to the relative weakness of the rouble.

Danone, the French food and drinks company, is Russia’s largest dairy producer and relies on the country for 11 per cent of its sales. The company suggested the impact on its costs due to the rouble rout would be minimised as it trades in Russia “very much at a local level with local brands”.

Retailers have raised prices in an effort to protect their margins. Ikea suspended sales of some products on its website last week after customers rushed to buy goods before price rises.

The Swedish flat-pack furniture company resumed all sales on Saturday, but Apple, which ceased all trading on its Russian website on Wednesday, is yet to restart sales.

Russia has been a source of difficulty for many international retailers operating there. New Look, the British fashion retailer, pulled out of the country in November, closing 20 franchised stores, while Mothercare, Marks and Spencer and Asos have all counted the cost of instability in the country in statements this year.

“Pretty much every company with international aspirations has been looking at Russia. But it’s not the attractive market it once was. These are medium-term issues that aren’t going to be resolved quickly,” said Freddie George, retail analyst at Cantor Fitzgerald. He said retail companies were likely to delay plans for expansion in the country as a result of the latest turmoil.

Luxury brands too have been hit and are likely to reduce or freeze capital expenditure in Russia, according to Luca Solca, analyst at Exane BNP Paribas. Russia accounts for roughly 4 per cent of the international personal luxury market.

Spending by Russian tourists abroad has been weakening throughout 2014, but until recently domestic spending had remained strong, according to Mr Solca.

“Spend in Russia has held up very well — at least up until this week, when luxury players have started to adjust Russian prices up materially,” he said.

Tobacco companies too are expecting to suffer from the falling rouble. Russia is the second-largest tobacco market in the world after China and according to Citi accounts for double-digit percentage sales of Japan Tobacco and Philip Morris International.

While tobacco groups are accustomed to operating in unstable countries, the weak rouble will affect sales, according to Chris Wickham, tobacco analyst at Oriel Securities.

“What you can’t avoid is currency. If you move into challenging currency conditions you have to translate that,” he said.



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