Founded in 1737 by Gustav Schweitzer, the Deutsche Brauerei is an award winning German producer of dark and light beer; a beer known for its signature full bodied, malty taste. The Schweitzer family has retained full ownership in the brewery for twelve generations and is wholly owned by sixteen Schweitzer aunts and uncles. The company has recently expanded beyond Germany and today, a large portion of the company’s net sales originate from sales the Ukraine (approximately 28%). The recent dissolution of the USSR has produced many opportunities for direct foreign investment in Ukraine; emerging from the rubble was a market practically “untapped”.
Having nearly three centuries of experience in its native Germany, the brewer has the recurring high revenues, unit volume sales and regular dividend payouts (up to 75%) to show for it. The question begging to be asked is; within only three years, how on earth have Ukrainian operations already grown to a disquieting 28% of annual net sales? Even more alarming is the company’s figure for projected growth in Ukraine (35% and 41% of total net sales in 2001 and 2002 respectively). Ukraine’s political environment, economic factors and cultural realities all foster extraordinary opportunities for direct foreign investment, however just as significant is the associated risk of doing business there. This report will explore the risk-return tradeoff of Deutsche Brauerei’s expansion into the Ukrainian market.
Board of Directors Meeting:
Three main questions will be addressed to help prepare for the company’s next board meeting: •Why must such a profitable company rely so heavily on debt and so little on internal financing? •Why has the company been so aggressive with dividend payouts while so little emphasis has been placed on the growth of retained earnings? •What is the appropriate compensation package for Oleg Pinchuk? Oleg Pinchuk is the director of sales and marketing, and the company’s pioneer behind its Ukrainian expansion.
Contraction of the expansion plans in the Ukraine, tightening trade-credit terms, lowering dividend payout ratio and compensating Oleg Pinchuk through share compensation based on increased, realized, cash sales.
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Growth in the Ukraine:
Deutsche’s outlook in Ukraine looks positive for a number of reasons. Fueled by the dissolution of the USSR and the fall of the Berlin Wall, the firm’s massive growth was initiated by their expansion of production capacity and infrastructure. Ukraine proved to be a promising market to penetrate because of the following factors: •The nation lacked a competing beer that could match the quality of Deutsche Brauerei’s fine selections. •Ukrainian regulators adopted a policy for market reform and privatization. •The country was new to the notion of capitalism; Ukrainian consumers were enthusiastic and looking forward to an introduction to a variety of quality goods. Consumer demand was overwhelming and shortages were developing across several industries. •Ukraine’s cultural factors also favored Deutsche’s new investment; Ukraine is the world’s 5th largest consumer of alcohol. According to the Guinness Book of World Records, the nation prides itself on having built the world’s largest champagne glass which is on display in the nation’s capital of Kiev. •The industry is fragmented, presenting relatively few barriers to entry: oIt should be noted however that a lack of barriers to entry is a double edged sword. An easy entry today may become an easy exit tomorrow if larger competitors are quick to follow suit. •Deutsche Brauerei has been in Ukraine for three years...