deustche case 11

8/2/2019 Deustche Case 11

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Deutsche

Brauerei


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Company Background

Ukraine Market Expansion

Sales and Marketing

Strategies Issues

Recommendations


3/22

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


4/22

Capacity 1.2 million hectoliters per year

equipment acquired in 1994 to replace

equipment destroyed in a fire German Market

an independent distributor networksupplies retail customers with inventory

purchased from Deutsche

Ukraine Market same type of distributor network, but

Deutsche holds substantial part of theinventory


5/22

1998 - the Shweitzers decide toexpand into Ukraine market: Excess Capacity in Germany

recent dissolution of the USSR

1995 1996 Ukrainian governmentmarket reform and privatization

Larger population (52 million) Strategic location within Central and

Eastern Europe


6/22

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 EUR92.1million and EUR2.9 million respectively

Ukraine customers account for 28% ofsales by early 2001


7/22

Initially plan was to use thesame distribution structure

Pinchuks strategy in Ukraine distributorships

Relaxed credit terms from 2%,10net 40 to 2%,10 net 80

Plans to extend to net 90 days(with 2% allowance for bad debt)


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Pinchuk also suggests: Give opportunity to those

entrepreneurs turned away by banks

EUR7 million investment for new plantand equipment in 2001

EUR6.8 million investment forwarehouse and distribution center inUkraine in 2002

Increase inventories held by Deutschefor Ukraine distributors


9/22

Financial Plan

Stock Dividend Declaration

New Compensation Plan for OlegPinchuk


10/22

Current Financials 1.173 million hectoliters sold in Germany

and Ukraine

Sales and Profit: approximately EUR92.1million and EUR2.9 million respectively

Ukraine customers account for 28% ofsales by early 2001

Note: Capacity available at entry, noadditional capital invested


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Actual Sal

$0

$20,000

$40,000

$60,000

$80,000

$100,000

1997 1998 1999 2000

(in

1,

000's)

Sales: German

Sales: Ukraine

Total Sales


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Pinchuks formula for determiningthe required marginal investment(aka investment in accounts

receivable)

IAR = (VC/Sales) x Change in AR

Projected Return on MarginalInvestment 123% in 2001

132% in 2002


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Pinchuks Analysis re: Return onInvestment Assumes fixed costs have been covered

ROI = After-tax Profit/IAR

Additional investment in fixed assets Increase in Ukraine inventories

Allowance for bad debt


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Deutsche BrauereiReturn on Investment Projections (in 1,000s)

Pinchuk Revised

2001 2002 2001 2002

Sales 37479 48722 37479 48722

Change in Sales 11631 11244 11631 11244

Variable costs (7752) (7494) (7752) (7494)

Contribution on Marginal Sales 3879 3750 3879 3750

Taxes on Marginal Contribution (1358) 1312 (1358) (1312)

Marginal After-tax Profit 2521 2437 2521 2437

Variable Costs/Sales 67% 67% 67% 67%

Change in Accounts Receivable 3074 2772 3074 2772

proposed investment in fixed assets n/a n/a (7000) (6800)


15/22

Proposed quartlery EUR698,000 (2.8million for 2001 (projected))

Traditional 75% dividend payout

Rapid sales growth does not alwayspay off in terms of more profits ordividends


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2000 compensation EUR81,440:

Base Salary EUR40,040

plus EUR41,440 (.5% on sales increase

over 1999)

5 distributorships, 211 customeraccounts on small budget and

increasing sales Proposed Increase:

Base Salary EUR48,000

Plus .6% of annual sales increase in


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Financial Plan

Slow down Ukraine expansion

Sales growth rate is increasing faster

than Asset growth (see RatioAnalysis)

Capacity available in 1998 but hascaught up quickly

Avoid borrowing due to increasingdebt/equity and debt/total capital(see Ratio Analysis)


18/22

Reduce dividend and retain more of theearnings to avoid borrowing

Pinchuks focus should be redirected to

collections (tighten credit to Ukrainedistributors), profits and efficient use ofassets

Increase Pinchuks base salary New base salary EUR44,000 plus bonus

of 1.5% of net earnings

Focus on profit instead of sales


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deustche case 11

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