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Deutsche Brauerei (DB) is a German company owned by 16 Schweitzer family members. It was founded in 1737, and has been in the family for 12 generations. DB manufactures two types of beer; light and dark. Both are well known and have won quality awards.

The case centers around the financing of the company’s expansion into the Ukrainian market (and possibly further into Eastern Europe) and its impact on financial planning, future dividends and employee compensation.

Background Facts

A fire destroyed the manufacturing plant in 1994. New equipment was purchased. The new equipment was more efficient and was capable of increasing the capacity. Once DB expanded into the Ukraine (1998), the additional capacity became necessary. The move into the Ukrainian market was very risky because in 1995 and 1996, their government was privatizing a lot of the free market. This did not impact DB.

For the Ukrainian market, Oleg Pinchuk was hired to market the beer very aggressively. He was stolen from a major Ukrainian rival. He had instant success because the beer was considered to be richer than the domestic competition. Also, the market was very fragmented which is easier for a newcomer to have instant success.

The DB beer in Germany served its markets through a network of independent distributors. The distributors purchased the beer, stored the beer in their refrigerated warehouses and then sold the beer to their customers. Since the Ukrainian market was new, Oleg could not rely upon an established network of distributors. He had to establish a distribution strategy for DB in the Ukraine. Oleg is providing financing to the Ukrainian distributors. But he has had to relax the

the Ukrainian Hryvna never recovered. the dividend declaration and the compensation for Oleg. the Ukrainian Hryvna was devalued against the DM. Problem Statement – Challenge – Opportunity Statement Greta Schweitzer will need to advise the board on the financial plan. in the latter part it is the Euro). break-even data. A key to the continued success in the Ukrainian market is Oleg. and will be increased again to net 90. During the time of this case. ROI for the Ukrainian investment and selected Ukrainian distribution data. and by 2002 it is projected to encompass 41% of revenue for DB. It was increased to net 80. One downside to selling products in the Ukraine is converting the currency back to their domestic currency (part of this case the domestic currency is the Deutsche Mark. pro forma balance sheets. It started at 2 percent 10. historical exchange rates. Ukraine was first penetrated in 1998. set-up financing. especially former Soviet countries. net 40. and find new markets in the country. Ukrainian sales have the same operating margins as German sales. It is probably more likely that international sales will surpass domestic sales if DB was to expand into other countries. Greta would need to determine if an aggressive penetration of Ukraine was necessary to obtain greater profits. and his knowledge of the country’s beer market is affluent. consolidated projected ratio analysis. Based on the old compensation agreement. It’s been trading in the same range against the Euro for the past two years. and his ability to network with the new distributors. Financial Analysis We are given the following financials to work with for the evaluation. Lastly. Appendix 3 details this analysis. The pro forma income statement shows us that the revenue from the Ukraine is very important for DB to grow. The Ukrainian growth rate is higher. pro forma income statements. sources and uses of funds statements. His services are very valuable. She would also have to analyze why DB was borrowing so aggressively yet they were so profitable. and it is feasible that one day the Ukrainian sales could surpass their domestic sales. Due to a Russian crisis in 1998.terms several times now. he would be set to .

They are paying a 75% dividend.earn €98 in 2001 and €96 in 2002. This will not make the board of directors happy. this is their source of income. This will free-up money for the Ukraine capital expansion. Starz and the Boston Beer Company) and they pay a good dividend which is around 1% to 5%.000 in each 2001 and 2002 (see appendix 4 for details). Greta needs to propose that they increase his salary. This will put an additional strain on working capital. The difference is these companies I mentioned are publicly traded.500 on the base salary. DB also needs to take into account the increase in days sales in accounts receivables because of financing in the Ukraine. decreasing the dividend in proportion to the payout on additional income until the free cash flow from operations can support the working capital.1% on new sales commission and €8. It will increase his pay by . The Ukrainian sales forecast would need to be lowered for 2001 and 2002. accounts receivables for DB will increase in the next couple forecasted years. They do not understand why if they are so profitable they need to borrow so aggressively. This will have a positive long-term effect. It would be a huge liability if he was to leave DB for a competitor. Molson. Due to the bootstrap financing the occurs in the country. and will need to be financed thru short-term debt. Compare this to other companies similar to DB (Anheiser Busch. Appendix 5 details out how DB can reduce its dependency on short-term financing. as previously mentioned. but since these companies are considered cash cows because of the high cost of barriers to entry. DB could lower their short-term borrowing by lowering their dividend. A 5% dividend is really high.5 million in additional profits can be reinvested into the company to fund its growth instead of increasing the owner’s income. My proposal is to freeze dividends to 2000 levels and to maintain the current cash position on the balance sheet from 2000. But a new compensation package is being proposed to the board. since it has been mentioned that for some of their family members. they are expected to pay a nice dividend. Or. Coors. But lowering the dividend can be offset against moving into new markets. This totals approximately €20. Diageo. it is something they should vote on at the next board meeting. And since this company is always positioning itself for the long-term. One of the concerns from the board of directors is their tendency to borrow aggressively. The Ukrainian market has a good financial projection. The €2. . The biggest driver to the short-term borrowing is the large dividend this company pays.

After that break-even point. Aggressively penetrate the Ukrainian market 2.5 million in profits for each year. all is not lost. This will result in an additional €2. Greta should advise the board that an aggressive penetration of the Ukraine will increase their income. He left a competitor to come to DB.Alternatives 1.maintain Ukrainian accounts (but do not actively add new accounts) Evaluation of Alternatives Alternative 1 involves penetrating the Ukrainian market with aggressive selling. They still have another market to for their . If the product has a media relation issue. Having a strong presence in another country other than Germany is a valuable strategic move for the company. A minimum of 100. Oleg’s employment needs to be secured. By aggressively marketing their product in the Ukraine. and approximately €2 million in additional dividends annually for the 16 owners. Diversification is important. In order to do this. It would also be a large risk for the company to lose him to a competitor. Aggressively penetrate the Ukrainian market. Do nothing .000 hectoliters of beer must be sold in order for DB to be profitable. and further to the former Soviet countries 3. He knows the market best. he would leave DB for a competitor if he was not receiving a good compensation package. and proof that DB should be aggressively marketing its product into new areas. The owners receive a 75% dividend on the company’s earnings. Exhibit 5 is a break-even analysis of DB. revenues are expected to increase by over €11 million in 2001 and 2002. profits will keep increasing faster than costs.

and show the impact of expanding into other countries will have on its financials. She should advise the board of the benefits of reinvesting the earnings back into the company to grow the company. First.inventory until the issue blows over. Alternative 3 may have been a good option in their first 260 years of business. It also is not difficult to tap into these markets. . The current downside is the foreign exchange rates. but this can be hedged against. That process can be duplicated in some of the other countries with fragmented beer markets.000 per year more. To be successful in the Ukraine. At only €20. Additional financing will be required. The Ukraine should be used as an example. Second. A key figure to show is that by 2002 (its 4th year). This should be Greta’s easiest proposal of the three. the formula was stealing Oleg from a competitor and having him set-up the distribution system. They should project out further than 2 years. The Ukrainian market has shown that there is a major market for their product outside of Germany. Greta should explain the short-term debt financing concerns are a result of excessive dividends. and into other Eastern European markets. Solution The solution is the suggestion that Greta Schweitzer will make to the board of directors. they will retain his services. Greta should advise on alternative 2. but it is no longer a smart business move. This is the aggressive expansion in the Ukraine. but the payout is very large. It is more supporting evidence for alternative 2. Greta will need to strongly advise to board to approve the additional compensation for Oleg. Just the Ukraine will have an ROI of over 130%. Third. the Ukraine will comprise of 41% of revenue. and that they have the same margins as the domestic market.