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