Table of contentIntroduction
Deutsche Brauerei is a German Beer Company located just outside of Munich, Germany. Founded in 1737 by Gustav Schweitzer, it remains a family owned business after 12 generations. Today it is run by GM Lukas Schweitzer, and recently welcomed Greta Schweitzer to its board of directors. The company is known for producing its award winning dark and light beers. Deutsche Brauerei strives to take financial care of its family stockholders, many of whom are retirees of the company, and currently pays dividends worth 75% of net earnings. Total dividends were EUR2.19 million in 2000, and projected to be over EUR3.2 million by 2002. In late 1998, Deutsche Brauerei entered the beer market in the Ukraine through a network of independent distributors. The beer was so popular in the relatively new market that 28% of the company’s sales in 2000 were from Ukrainian consumers. That number is expected to climb to 41% by the end of 2002. Deutsche Bruereri hired Oleg Pinchuk to aggressively market their beer in the Ukraine. His salary in 2000 was a base of EUR40,000 plus EUR41,440 (0.5% * Increase in Ukrainian Sales.). His 2001 salary is expected to be in excess of EUR118,000 (EUR48,500 * 0.6% increase in sales). The company is on the verge of reaching maximum production compacity and must expand, be it in Germany or abroad. The challenge will be how to finance these improvements
Should Deutsche Brauerei continue to export to the emerging Ukrainian beer market and how will they finance a possible expansion of production capacity and distribution networks
We came up with 3 different solutions that all will solve the decision Deutche Braiery need to make for its future operations. The first option for Deutsche Brauerei is to cease distribution network in the Ukraine. With this possible solution the older relative family members are kept happy with the annual 75% dividend payout from earnings. Also, the company would not have to increase Pinchuck’s pay seeing his position will no longer be needed for the company causing an increase in their cash balance. This is the least riskyrisk. Our second solution is to continue to sell our products in the Ukrainian market but without making any major capital investments in Ukraine. Instead we will invest in human capital like Oleg , and in that way improve our distribution network in the Ukraine market. This will increase sales and require us to expand the current factory in Germany. By taking a conservative approach, it allows us the opportunity to detect any effects of the current warning signs of a global economic recession which could severely disrupt a more expensive route that involves our 3rd solution: leasing a brewery in the Ukraine. The final and most risky solution is to expand production to Ukraine for a faster response to demand, decreased distribution cost and increase production capacity. We are experiencing a high demand in Ukraine, so instead of having to transport our beer from Germany to Ukraine, we will simply produce and store it at a factory in Ukraine. The expansion of production capacity is impossible to avoid, so we find it better to expand production closer to the demand in Ukraine to avid high transpiration cost.
Factors we bring into our decision criteria must address the increasing risk that we will reach our maximum capacity if we do not either invest in our plant in Germany or begin the process of leasing a brewery in order to increase production within the Ukraine. We must select a solution that can increase our cash balance and decreases the dividend payout and Oleg’s salary. We want to find a solution where risk is justified by potential profits. Most important we need to evaluate the Ukrainian market and current distributors to find out if we find it profitable to expand in an emerging market as Ukraine. The Russian debt crises in 1998 made the...
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