Deutsche Brauerei

Introduction

Deutsche Brauerei is a family owned brewery in Germany, founded by Gustav Schweitzer on

1737 at village outside Munich, Germany. It is producing two varieties of beer, dark and light for which it
had won quality awards over the years. Over the 12 generations of Schweitzer management, the family
has managed the company only through their knowledge in brewery since they have no experience on
marketing and finance and brewery was the only background their family has. They believe that their
good quality product will help build a strong company that shall be profitable over years.
Deutsche Brauereis rapid growth in recent years can be attributed to several factors such as
winning various awards, the increase in brewery capacity of the companys equipment and the entrance
of the company to the Ukraine Market in 1998. When USSR has collapsed, Deutsche Brauerei used the
opportunity to capture Ukraines large population and capitalize on its strategic location. They accepted
distributors as part of their expansion un Ukraine. Those distributors purchased Deutsches beer, stored it
temporarily in their own refrigerated warehouses and ultimately sold it to their customers at the retail end
of the distribution chain. With the help of Oleg Pinchuk who was hired away from a major Ukrainian beer
producer, one of their competitor, it contributed significantly to the rapid growth of the company.
Upon entering the Ukraine Market, they have to establish beer-distribution pipeline in the country
because it does not exist. The Ukrainian distributors were not like any other distributors that they had,
they were interested in the product but they do not have enough capital and cannot get bank credit. So, to
enter the market, Deutsche borrows from the bank at 6.5% and relends the funds through inventories to
the distributors and retailers. Deutsche also decided to soften the credit terms for them, from 2,10n40 to
2,10n80. Then, Deutsche Brauerei entered the Ukraine Market through these independent distributors.
Due to its full-bodied, malty taste, Deutsches beers became famous immediately in Ukraine that the
volume of sales have had offset the effect of the depreciation of Ukrainian currency at that time. By early
2001, 28% of Deutsche Brauereis sales were already Ukraine. After these said events to the company,
Greta Schweitzer, the niece of the current managing director, Mr. Lukas Schweitzer will now be joining
the company to help in assessing the agendas to be discussed in her very first meeting with the members
of the board which are as follows: 1) approval of the 2001 financial budget, 2) declaration of the quarterly
dividend, and 3) adoption of a compensation scheme for Oleg Pinchuk, the companys sales and
marketing manager.

Statement of the Problem

1.) How would Greta Schwitzeir vote on:
a. The 2001 financial plan budget?
b. Declaration of the quarterly dividend?
c. Adoption of compensation scheme for Oleg Pinchuks salary raise?

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Osial, Krystal Anne, General, Jan Michael, Padua, Blessy, Ybaez, Noemi Joy

SWOT, PORTER, TOWS

INTERNAL

NEGATIVE

STRENGHTS:
Very high quality product.
Strong brand image.
Large market share

WEAKNESSES:
High reliance on debt financing
Large investments on accounts
receivables.
Longer terms of trade

EXTERNAL

POSITIVE

OPPORTUNITIES:
Development
of
international
expansion.
High demand in the coming years.

THREATS:
Risk on bad debt expense may
increase materially.
Potential new entrants.

Strengths
Over the past years, Schweitzers were into brewery and not finance or marketing. From this, rest assured
that they would give very high quality products because brewery has been in their family for so long. In
fact, the company had been doing business for 12 generations in the Schweitzer family. It earned a very
strong brand image. Through years of practice, Schweitzers were able to produce products that could be
sold at a price they asked for which favored their Company as the consumers still insist in buying their
products. Aside from those, the beer won popularity for its full-bodied, malty taste. Deutsche Brauerei has
a large market share in Germany and it manages to capture a good market share in Ukraine.
Weaknesses
One weakness of the Deutsche Brauerei is that they highly rely on debt financing. Aside from that, the
company also has large investments on accounts receivables because they believe that trade-credit
concessions are the best financing they can use and they trust their distributors too much believing that it
is one of the best way they can earn profit the most especially in Ukraine. They also plan to extend the
terms that they give which is a bit risky for the company.
Opportunities
Given that the company expects a high demand for product in coming years, the company who has a
very strong brand image has a high possibility succeeding in global expansion since consumers would be
interested in imported high quality products.

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Osial, Krystal Anne, General, Jan Michael, Padua, Blessy, Ybaez, Noemi Joy

Threats
Bad debt amount may increase as the company has large investments on accounts receivable. Relaxing
the payment term may have negative impact for the company. Other threat for the company is
competition. As the boom in the beer industry continues, potential entrance of competitors also increases.
Lastly, the global economic recession may affect the company in the future.
Alternative Courses of Action
Greta Schwitzeir should suggest:
(A. 2001 Financial plan budget)
To continue Olegs proposal to invest in a new plant and equipment in Ukraine in 2001 amounting
to EURO7 million in order to exhaust existing unused product capacity by late 2001. Since past
expansions brought success to the company, there will be a high probability that future expansions will
also make the company profitable in the future which was shown in the forecasted income statement
(Appendix A). How profitable this investment would have, will depend on the ability to manage possible
risk. The computations in Appendix B provide further explanations for the acceptance of the investment.
NPV is positive and therefore, the proposal should be accepted.
To provide controls on distributor performance in order to be aware of significant changes such
controls include monthly reports, visits and inspections of facilities and inventories and constant
monitoring of receivables collection. Comparisons in Exhibit 7 shows that some of the distributors provide
lower profit margins for the company due to poor cost control. Greta should also suggest to tighten the
credit policy toward the Ukrainian distributors in order to reduce borrowing needs and revert back to the
original credit term of the company for all distributors, which is 41 days as shown in Appendix C.
To stop the Ukrainian expansion since the analysis that Pinchuk made ignores relevant data that
can significantly affect the return on investment, such relevant data includes inventories and fixed assets.
Also, Pinchuks analysis assumes no losses on credit extended which takes for granted the possible risk
of the expansion. A sensitivity analysis on credit losses computed in Appendix D shows a high loss rate
than the usual credit losses. The 32 % loss in outstanding receivables made the ROI fall below the
Deutsches cost of borrowing which should be higher than the normal rate.
(B. Declaration of the quarterly dividend)
To reduce its payout ratio since 75% is a huge ratio that may discourage the debt holder since
the company is relying on long term debt and new investment for further business expansion.
To retain the 75% payout ratio and not cut too much dividend considering the issue that the board
of directors cannot tolerate the dividend reduction since it is mainly composed of family members and
most of them are retired person. The 75% dividend payout will still provide a high ROE as shown in
Appendix E.
(C. Adoption of compensation scheme for Oleg Pinchuks salary raise)
To not increase Pinchuks base salary from EURO40,000 to EURO48,500 and not consider the
incentive payment of .6 percent of the annual increase in sales since Lukas Schwitzeir only focus on
Pinchuks sales accomplishments which is the rapid growth of sales and distributorship without
considering the investors interest and concern that one day the expansion in Ukraine will stop, and when
it does, the huge field inventory will spoil and the receivables will default.

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Osial, Krystal Anne, General, Jan Michael, Padua, Blessy, Ybaez, Noemi Joy

Recommendations
Given all the facts and events that are present in Deutsche Brauerei and upon considering
Ukraines investments to inventories and capital expenditure, we recommend to improve the credit policy
of Deutsche Brauerie for Ukranian distributors giving them higher discounts to them who pay their
accounts in full or on time. It will lead to reduction of the chance of getting past due payments and
minimizing their receivables as a response to projected increase in the bad debt expense of the company.
With regards to the expansion plan, we recommend that Deutsche Brauerie should be careful in
when to purchase the equipment. They should not heavily rely on financing. There is an assumption by
Oleg that Ukraine Sales will increase further, but the beer market is still on its early stage and it will be
risky for the company to assume right away. Aside from that, decrease in market share and volume sales
are inevitable in their case, thus, expansion plan should not be their focus.
Also, they should be careful and conservative in declaring dividend to see if the forecasted
amounts match actual earnings. If the record shows meeting projections with the actual earnings,
Deutsche Brauerie could pay higher dividend in order to achieve 75% dividend payment. For the
meantime, the companys focus should be the future generations as they are always into their familys
business which they had preserved and improved for twelve generations already. Lastly, increasing
incentives for Oleg is a must. However, only the fixed income should be increased, but should leave the
compensation at 5%, as the projected increase in volume sales will still net Oleg a reasonable incentive
package.

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Osial, Krystal Anne, General, Jan Michael, Padua, Blessy, Ybaez, Noemi Joy

APPENDICES
APPENDIX A
DEUTSCHE BRAUEREI
Historical and Projected Balance Sheets
Fiscal Year Ended December 31; all figures in thousands

APPENDIX B

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Osial, Krystal Anne, General, Jan Michael, Padua, Blessy, Ybaez, Noemi Joy

APPENDIX C
DEUTSCHE BRAUEREI
Sensitivity Analysis of Financial Forecast
(in thousands of euros)
The following table gives the short-term debt balances, annual net income, and return on equity
for the following three scenarios, in which changes have been made solely in the 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% per year (down from 45% and 30%).

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Osial, Krystal Anne, General, Jan Michael, Padua, Blessy, Ybaez, Noemi Joy

B.

The plant is not expanded in 2001 and 2002; company sales growth in the east and west is only
2% 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%.

APPENDIX D
Sensitivity Analysis of ROI to Variations in Credit Loss Percentage

APPENDIX E

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Osial, Krystal Anne, General, Jan Michael, Padua, Blessy, Ybaez, Noemi Joy