Consumer Slowdown Key Risk For Russia-Exposed Companies

With so many sector analysts looking at implications for companies with exposure to Russia and Ukraine, let us begin by saying that few major companies would have taken big bets on Russia in particular and expected an uncomplicated path. Arguably above-average risk premiums in European terms would have been inputted into any risk/reward used by the likes of Carlsberg and Danone, which are two major global food and drink companies with major exposure to Russia. This article will look at some of the main foreign food and drink companies with exposure to Russia and briefly look at how domestic companies might be impacted.

Europe Team View

At things stand, BMI's Europe Country Risk team's core view is that any US and EU actions will be limited to diplomatic mediation efforts, with the possibility of targeted economic sanctions in the future. With no support forthcoming from Western powers, we expect the Ukrainian army will be unwilling to launch any offensive against Russian troops, which substantially outnumber the Ukrainian forces. The team remain wary of revising down their 2014-2015 growth forecasts for Russia simply on the basis of the heightened confrontational rhetoric by both the US and EU member states on the one hand, and Russia on the other. While both sides have ramped up threats to impose sanctions on each other, we believe that neither side has a rational interest in seeing the stand-off escalating further.

Pulling Back Losses
Selected Companies Re-based Share Prices (February 28 2014=100)

With so many sector analysts looking at implications for companies with exposure to Russia and Ukraine, let us begin by saying that few major companies would have taken big bets on Russia in particular and expected an uncomplicated path. Arguably above-average risk premiums in European terms would have been inputted into any risk/reward used by the likes of Carlsberg and Danone, which are two major global food and drink companies with major exposure to Russia. This article will look at some of the main foreign food and drink companies with exposure to Russia and briefly look at how domestic companies might be impacted.

Europe Team View

At things stand, BMI's Europe Country Risk team's core view is that any US and EU actions will be limited to diplomatic mediation efforts, with the possibility of targeted economic sanctions in the future. With no support forthcoming from Western powers, we expect the Ukrainian army will be unwilling to launch any offensive against Russian troops, which substantially outnumber the Ukrainian forces. The team remain wary of revising down their 2014-2015 growth forecasts for Russia simply on the basis of the heightened confrontational rhetoric by both the US and EU member states on the one hand, and Russia on the other. While both sides have ramped up threats to impose sanctions on each other, we believe that neither side has a rational interest in seeing the stand-off escalating further.

Pulling Back Losses
Selected Companies Re-based Share Prices (February 28 2014=100)

Key Food & Drink Players

Many of the world's leading soft and alcoholic drinks companies are well represented in Russia, which is unsurprising given the country's size. Of the major companies, Russia carries the most importance to Carlsberg as it is estimated to account for between 35-40% of the company's operating income. Therefore, we will begin our analysis by looking at how markets have reacted and then gauge whether the Russia/Ukraine crisis will materially impact Carlsberg's prospects.

Carlsberg's Copenhagen-listed shares sold off by about 5.3% on March 3 2014 as part of the wider sell-off in Russia/Ukraine exposed assets. It has since pulled back about 2.8% of these losses at the time of writing as part of a broader reaction by markets to the move by Vladimir Putin to call back troops to their bases. In our opinion, in the absence of sanctions we do not believe that the underlining businesses of Carlsberg and of the other major food and drink companies operating in Russia and selling products to be consumed in Russia are likely to be majorly impacted by the Russia/Ukraine crisis.

However, companies will probably be a lot more cautious and may well delay or scale back planned investment until there is much more visibility. Hard hitting sanctions, which in the opinion of the Europe team remain a non-core scenario, would perhaps impact sourcing and therefore input price risks depending on terms. On the input price theme, the weakening rouble is of concern to food and drink and wider consumer-facing companies given that this will make importing raw materials into Russia more expensive, and will also weaken the purchasing power of the consumer base. This is the core risk in our opinion. For a company like Carlsberg, which has faced numerous issues in Russia on the back of much higher beer taxes and stricter regulation of the off-trade retail sector, this would pose yet another challenge.

We briefly look at some of the other major food and drink companies that have major exposure to Russia:

  • Danone (Food - Dairy) : Russia is the French food giant's largest international market. Its share price sold off by about 2.5% on March 3 but has since regained this. Of the global food majors it has the most riding on Russia so its core risk likely comes from the likely weakening in consumer spending on the back of the depreciating rouble in particular.

  • PepsiCo (Soft Drinks) : PepsiCo has a major drinks and snacks business in Russia. The country is its largest international market and, like Danone, its main risk will likely come from a slowdown in consumer spending.

  • Magnit (Discount Food Retailing) : The leading food retailer in Russia and entirely focused on discount stores. The risk again is the slowdown in consumer spending and the prospect of more expensive importing, although the company is more focused on the mainstream market than some of its more upscale rivals, which means that it sources more goods locally. Its share price sold off by more than 10% over the past day or so before pulling back. The initial sell-off came after a really strong run, and there was likely an element of profit-taking here that led to a more severe initial sell-off.

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Related sectors of this article: Food & Drink
Geography: Russia
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