Deutsche Brauerei

Topics: Finance, Debt, Generally Accepted Accounting Principles Pages: 8 (3160 words) Published: August 11, 2010
Deutsche Brauerei was founded in 1737 and has been in the Schweitzer family for 12 generations. The company produces quality beer and has won awards over the years and is owned entirely by 16 uncles, aunts and cousins. In 1998, Deutsche Brauerei expanded into Ukraine. Despite the Russian debt crisis, the popularity of Deutsche’s beer increased its sales greatly and within three years of launch, Ukrainian consumers accounted for 28% of Deutsche’s sales. Furthermore, most of the unit growth in sales during that time period was also contributed by Ukraine. In an attempt to market the beer even more aggressively, Lukas hired Oleg Pinchuk, a marketing guy who understood the Ukrainian markets and had previous experience of marketing beer for a major Ukrainian beer producer. In the following report, we aim to evaluate the past and prospective financial performance of the company, dividend policy and to critique its liberal credit and inventory policies. An appropriate compensation scheme will also be recommended. Adoption of a Compensation Scheme for Oleg Pinchuk

It is our belief that Oleg Pinchuk does deserve an increase in his compensation package to provide incentive for him to stay and provide future results. His strategies for setting up infrastructure in the Ukraine have been fundamental to the company’s sales growth. We are also concerned that some of his current policies may not be profitable and are taking on too much risk as the economy shows signs of a recession. Also, we highly recommend that the design of the compensation package be changed as it currently creates a large agency problem. In 1998, Deutsche Brauerei employed Oleg Pinchuk as the Company’s Sales and Marketing Manager. Previously Pinchuk has worked for a major beer producer in the Ukraine giving him invaluable insight into the industry and environment. The main goals he was placed with was to market Deutsche Brauerei’s beer more aggressively while taking advantage of the large opportunities existing in Central and Eastern Europe. “Our beer almost sells itself; discount pricing and heavy advertising are unwarranted. The challenge is getting people to try it and getting into a distribution pipeline.” Pinchuk quoted. Initially in 1998, Ukraine had no beer distributors, presenting a large problem – the company had no means of distributing the product amongst customers. Distributors in the Ukraine had no capital and could not receive financing from banks to set up their business because they had no collateral, low profits, negative cash flows and were seen as a high risk. They were also not able to bear the credit terms that were currently implemented on the German distributors. This is where Pinchuk’s strategies have been essential for our expansion into the Ukraine. Pinchuk, on a small budget, managed to organise five distributors and set up warehouse arrangements. He relaxed the credit policy for the Ukraine distributors from 2% 10, net 40 to 2% 10, net 80 – essentially financing their business and making it possible for them to set up and operate. Carrying a substantial part of the distributor’s inventory also took pressure and costs away from the distributors while making it possible to respond rapidly to changes in demand. These strategies have increased customers in the Ukraine from 0 to 211, with even more expected in 2001. For Oleg’s strategies to be implemented, the business has required large working capital investments. Particularly in accounts receivable where days in receivables is nearly 90 days. We believe that Pinchuk’s analysis of the return on investment has been overstated because he hasn’t taken into account the investments in inventory and capital expenditure that would also be needed. Exhibit 3 shows our adjusted analysis of the return that the business is receiving after taking into account changes in inventories and capital expenditure. We assumed that 85% of changes in inventory and 90% in capital expenditure...
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