Deutsche Brauerei

Company Background Ukraine Market Expansion Sales and Marketing Strategies Issues Recommendations

Name says it all GERMAN BREWERY Family owned since 1737 Located close to Munich Produces two varieties of award winning beer Greta Schweitzers recent appointment to the board of directors

Capacity

1.2 million hectoliters per year equipment acquired in 1994 to replace equipment destroyed in a fire an independent distributor network supplies retail customers with inventory purchased from Deutsche same type of distributor network, but Deutsche holds substantial part of the inventory

German Market

Ukraine Market

1998 - the Shweitzers decide to expand into Ukraine market:

Excess Capacity in Germany recent dissolution of the USSR 1995 1996 Ukrainian government market reform and privatization Larger population (52 million) Strategic location within Central and Eastern Europe

2000 Performance

Oleg Pinchuk, sales and marketing manager, hired in 1998 1.173 million hectoliters sold in Germany and Ukraine close to capacity Sales and Profit: approximately EUR92.1 million and EUR2.9 million respectively Ukraine customers account for 28% of sales by early 2001

Initially plan was to use the same distribution structure Pinchuks strategy in Ukraine
distributorships Relaxed credit terms from 2%,10

net 40 to 2%,10 net 80 Plans to extend to net 90 days (with 2% allowance for bad debt)

Pinchuk also suggests:

Give opportunity to those entrepreneurs turned away by banks EUR7 million investment for new plant and equipment in 2001 EUR6.8 million investment for warehouse and distribution center in Ukraine in 2002 Increase inventories held by Deutsche for Ukraine distributors

Financial Plan Stock Dividend Declaration New Compensation Plan for Oleg Pinchuk

Current Financials

1.173 million hectoliters sold in Germany and Ukraine Sales and Profit: approximately EUR92.1 million and EUR2.9 million respectively Ukraine customers account for 28% of sales by early 2001 Note: Capacity available at entry, no additional capital invested

Actual Sales
$100,000 $80,000 (in 1,000's) $60,000 $40,000 $20,000 $0 1997 1998 1999 2000
Sales: Germany Sales: Ukraine Total Sales

Pinchuks formula for determining the required marginal investment (aka investment in accounts receivable)
IAR = (VC/Sales) x Change in AR

Projected Return on Marginal Investment

123% in 2001 132% in 2002

Pinchuks Analysis re: Return on Investment

Assumes fixed costs have been covered ROI = After-tax Profit/IAR

Additional investment in fixed assets Increase in Ukraine inventories Allowance for bad debt

Deutsche Brauerei
Return on Investment Projections (in 1,000s) Pinchuk 2001 Sales Change in Sales Variable costs Contribution on Marginal Sales Taxes on Marginal Contribution Marginal After-tax Profit 37479 11631 (7752) 3879 (1358) 2521 2002 48722 11244 (7494) 3750 1312 2437 Revised 2001 37479 11631 (7752) 3879 (1358) 2521 2002 48722 11244 (7494) 3750 (1312) 2437

Variable Costs/Sales Change in Accounts Receivable proposed investment in fixed assets

67% 3074 n/a

67% 2772 n/a

67% 3074 (7000)

67% 2772 (6800)

Proposed quartlery EUR698,000 (2.8 million for 2001 (projected)) Traditional 75% dividend payout Rapid sales growth does not always pay off in terms of more profits or dividends

2000 compensation EUR81,440:

Base Salary EUR40,040 plus EUR41,440 (.5% on sales increase over 1999)

5 distributorships, 211 customer accounts on small budget and increasing sales Proposed Increase:

Base Salary EUR48,000 Plus .6% of annual sales increase in

 Financial Plan Slow down Ukraine expansion Sales growth rate is increasing faster than Asset growth (see Ratio Analysis) Capacity available in 1998 but has caught up quickly Avoid borrowing due to increasing debt/equity and debt/total capital (see Ratio Analysis)

Reduce dividend and retain more of the earnings to avoid borrowing Pinchuks focus should be redirected to collections (tighten credit to Ukraine distributors), profits and efficient use of assets Increase Pinchuks base salary

New base salary EUR44,000 plus bonus of 1.5% of net earnings Focus on profit instead of sales