Deutsche Braueri

Subject: Deutsche Braueri

Date: February 14, 2008

I. Introductory Paragraph

Deutsche Brauerei has been a family owned and operated corporation for 12 generations, which has created a high level of focus and control. Each generation has kept the management and operations processes relatively simple, centered on brewing practices and quality. Deutsche Brauerei’s rapid growth in recent years can be attributed to several factors. First and foremost, the company’s success is centered on the product itself, which has won numerous quality awards and is quite popular in Germany. Another contributing factor to the recent growth may have been a bit inadvertent. The purchase of new equipment in 1994, which was necessary as a result of a fire that destroyed the old equipment, allowed the company to increase brewing capacity and efficiency. Finally, Deutsche Brauerei’s decision to enter the Ukranian market in 1998 contributed significantly to the rapid growth. The collapse of the U.S.S.R. brought market reforms, and Deutsche Brauerei jumped on the opportunity to enter the fragmented beer industry, capture the large population and capitalize on the prime location in Europe. Lukas Schweitzer was savvy enough to hire local expert Oleg Pinchuk away from a competitor as the marketing manager, and Oleg was instrumental in building the business in Ukraine by securing accounts and implementing the field warehousing to support distributors. Deutsche’s beer was hugely popular in the Ukraine almost immediately, and volume sales more than offset the depreciation of the Ukrainian currency. Sales in Ukraine accounted for 28% of Deutsche’s total sales, and skyrocketed from 4,262 euros in 1998 to 25,847 euros in 2001.

II. Statement of the Case Problem

Greta, niece of Lukas and a recent MBA graduate, has newly joined Deutsche’s board of directors and must make a recommendation on three issues: the financial plan for 2001, the declaration of a quarterly dividend, and adoption of the proposed incentive and compensation package for Oleg. The financial plan includes a 7 million euro investment in new plant and equipment for the Ukrainian operations in 2001, followed by a 6.8 million euro investment in 2002 for a new Ukranian warehouse and distribution center. This is a significant investment, and the practicality of rooting themselves in the Ukraine in this manner needs to be fully assessed before Deutsche commits to such an expensive endeavor.

The quarterly dividend proposed is 698,000 euro, an amount equal to 25% of the projected 2001 dividends. However, this dividend increase is based on projected earnings, and several factors affect whether those earnings will materialize.

Finally, Lukas has recommended an increase in base pay and incentives for Oleg, from a salary of e40,000 plus 5% of the annual sales increase in Ukraine, to e48,500 and 6% of sales. While Oleg has worked hard and produced results over the past 2 Ð'Ð... years, a compensation package based on sales alone is unwise, as several factors affect a company’s profitability.

III. Analysis of Problem

When DB first entered the Ukranian market, Oleg relaxed the credit policy for Ukranian distributors from 2 percent 10, net 40 to 2 percent 10, net 80 (clients could take a 2% discount if payment was made within 10 days of the invoice, otherwise payment was due in full within 80 days). The credit policy for Ukranian distributors differed because Ukrainian entrepreneurs, while eager and entrepreneurial, were not privy to the same capital or bank loans that German distributors had access to. The credit policy for the Ukranian distributors was appropriate, given that they were expanding, getting new equipment, and required more time than usual to pay. A flexible credit policy in the Ukraine is appropriate initially while building relationships and as the beer distribution pipeline is developed. However, Oleg would like to extend the credit policy from 80 to 90 days. The current receivables show e6,168 in 2000 and is projected to increase about 50% in 2001 and then another 30% in 2002. Having money tied up in accounts receivables is certainly not as profitable as having cash in hand. Oleg’s proposal to relax the credit policy even further is a high risk and may result in distributors settling accounts even later.

Assuming for the moment that investment in new plant and warehouse in the Ukraine is a good idea, Deutsche doesn’t appear to be sufficiently financially fit to pull it off. While sales have grown rapidly for the past few years, the increasing amounts of bank debt reveal that Deutsche doesn’t have the cash to finance their growth. A good portion of their profits is tied up in inventories and accounts receivables (Exhibit 1). The quick ratio of roughly 0.85 (Exhibit 4 in the case) indicates Deutsche isn’t able to meet short term obligations as well as it should. It appears Oleg had a bit of tunnel vision when it came to increasing sales, at the expense of Deutsche’s overall profitability.

Indicated assumptions:

A. Credit extension is cut back in the east to 41 days and the annual rate of sales in the east grows only 2 percent per year (down from 45 percent and 30 percent).

B. The plant is not expanded in 2001 and 2002; company sales growth in east and west is only 2 percent per year. Days sales outstanding in both east and west are 41 days/

C. Dividend payments as a percentage of net income are reduced to 25 percent.

D. Your scenario that combines any and all of above in various amounts and keeps the 2000 short debt at approximately €13,000.

Scenario Short-Term Debt Net Income Return on Equity

2001 2002 2001 2002 2001 2002

A.

10,626 10,530 3,606 3,811 12.3% 12.6%

B.

4,276 (1,387) 3,874 4,315 13.2% 14.2%

C.

15,939 17,160 3,805 4,489 12.2% 13.0%

Base Case

17,862 21,372 3,724 4,311 12.7% 14.2%

When we modify the 2001 forecast assumptions for