Case 2 reference questions:

1) What accounts for Deutsche Brauereis rapid growth in recent years? Specifically,
what policy choices account for this success?

2) What is Deutsche Brauereis credit policy toward its distributors in Ukraine? Why is it
different from the policy toward its other distributors? Is the companys credit policy
appropriate? Is it profitable? If not, how would you change it? If so, what arguments
would you offer to the board of directors in its defense?

3) Why does this profitable firm need increasing amounts of bank debt?

4) As a member of the board of directors, how would you vote on:

a. The proposed raise for Oleg Pinchuk?
b. The quarterly dividend declaration of EUR698,000?
c. Adoption of the financial plan for 2001?
I. Introduction

Deutsche Brauerei is a family owned and operated German Beer Company for 12
generations founded in 1737 by Gustav Schweitzer. It was founded on a village outside
Munich, Germany. The company produces two varieties of beer, the dark and the light.
Over the 12 generations of Schweitzer management, the family has managed the
company only through production know-how since they have no idea on marketing and
finance. Each generation has kept the management and operations processes relatively
simple, centered on brewing practices and quality. They believed that product with
excellent quality can survive the market for a long time. The companys rapid growth may
be attributable to the success of its products, 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, DB used the opportunity to capture
Ukraines large population and capitalize on its strategic location.
Upon realizing that the company needs more than production know-how to
penetrate the Ukraine Market, the managing director, Lukas Schweitzer, hired Oleg
Pinchuk as the sales and marketing manager of Deutsche. However, before entering the
Ukraine Market, they also must establish a beer - distribution pipeline in the country
because it doesn't 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. DB, then
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 has been already Ukraine.
Greta Schweitzer, the niece of the current managing director, Mr. Lukas Schweitzer is
now joining the company and was asked to assess the agendas to be discussed in her
very first meeting with the members of the board.

II. Statement of the Case Problem

Greta Schweitzer, an MBA graduate and new member of the board of DB, is facing
problems in recommending on the three issues to be tackled in her first meeting with the
board: 1) financial budget for 2001, 2) declaration of the companys quarterly dividend,
and 3) adoption of the proposed compensation scheme for Mr. Ole Pinchuk.
The 2001 financial plan will need an investment of 7Mn Euros for new plant and
equipment in 2001 and another 6.8Mn Euros in 2002 for a new Ukrainian warehouse and
state-of-the-art distribution centers. 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. It is an important decision since it
requires a significant amount of money outlay for the company.
The proposed 25% of projected 2001 dividends amounting to 698,000 euros to be
declared as

Strategy
1. Serves its market through a network of independent distributors.
2. The distributors purchase Deutsches beer
3. Stores it temporarily in their own refrigerated warehouse
4. Ultimately sell it to their customers at the retail end of distribution chain
5. Organize five distributorships
6. Attract 211 customer accounts
7. Set up warehousing arrangements
8. Loosen credit policy to attract customers
Performance
Blooming era in Ukraine according to Pinchuk
Sales grew 47% in 2000 and is expected to continue growing
Return from financing receivables reach 130%
Risks and Returns
Risks:
Ukrainian market is more risky
Profitability is not fully predicted
Distributors delay in payment despite loose credit policy
Returns:
Company might incur loss because of increasing variable costs.
Company could be forces into bankruptcy if it fails to pay for its short-term
borrowings.

Recommendation:
1. Tighten credit policy towards the Ukrainian distributor. This will reduce sales and
increase sales and increase liquidity of the company.
2. Cut dividend payout to at least 50% to be able to cover their debts and partially
financial expansion
3. Stop capital expansion in Ukraine. The market appears to be very risky.
4. No salary increase for the sales manager. He contributed more in damaging the
financial health of the company than increasing its profitability.
5. Reduce short-term borrowing and use the companys property to back up its long-
term borrowing to reduce risk.