Deutsche Brauerei Case Analysis and Proposal
Deutsche Brauerei is a German brewery founded in 1737 and owned by the Schweitzer family for 12 generations. Headquartered in a village outside of Munich, the company expanded into the Ukraine in 1998 following the dissolution of the U.S.S.R due to surplus production capacity and resolved to penetrate the new market that had developed in Eastern Europe.
In January 2001, Greta Schweitzer joined the board of directors. She requires assistance in determining how the company should proceed into the future to achieve optimum financial results and maximize future profit. Approval of the 2001 financial budget, the declaration of ...view middle of the document...
Pinchuk extended credit in the form of trade-credit concessions to the distributors and has relaxed the credit terms from 2/10, net 40 (as traditionally offered by Deutsche to distributors in Germany) to 2/10, net 80 with a proposed increase to 90 days. The distributors use “bootstrap financing” – delaying their payments to Deutsche to finance retail enhancements as they cannot finance through bank credit. Moreover, the Ukrainian distributors are extending credit to their retailers, making timely trade payables back to Deutsche even more difficult. Furthermore, Pinchuk’s marketing strategy involves field warehousing - carrying a substantial part of distributors’ inventory on the books of Deutsche Brauerei. This resulted in a sizable increase in inventory for the Company in 1999 and 2000.
Management is please with Pinchuk’s performance. His current earnings are €81,440. General Manager, Lukas Schweitzer, proposes to increase Pinchuk’s base salary from €40,000 to €48,000 and incentive payment from 0.5% to 0.6% of the annual sales increase in Ukraine. While Pinchuk has worked hard and produced results over the past 2 ½ years, a compensation package based on sales alone is unwise, as several factors affect a company’s profitability.
Profitability and Growth
The company has enjoyed sustained profitability since 1997, with sales in 2000 reaching €92.1 million with a resulting net profit of €2.9 million. Sales in Germany have grown modestly, with a cumulative annual growth rate of 2.33%. Ukrainian sales have been the main driver in sales growth, having grown 312% in 1999 and 47% in 2000 with a CAGR of 66.77% year-to-year. Deutsche projects sales growth to remain high in the Ukraine in 2001 at 45%. This rapid increase outpaces Deutsche’s sustainable growth rate by a large margin. In the current year, 2000, Deutsche’s sustainable growth is calculated at 2.57%, far beneath the actual recent past and present growth figures. Despite rising sales as described, the operating profit margin is actually declining. In 1998, profit margin increased 13% to €5,113,000. Since then, it has gone down 4%, up 25% in 2000, up 21% projected in 2001, and up 13% projected in 2002, respectively. This leads us to believe that there is some issue driving down the amount of profit the company is making year-over-year.
Accounts Receivable and Collections
Accounts receivable in the Ukraine is rising rapidly. The first year of operation in the Ukraine led to accounts receivable of €424,000. Since then, accounts receivable have grown at 864%, 51%, and a projected 50% in 2001, respectively. In Germany, days in receivables has remained fairly steady at an average of 41 days. However, in the Ukraine, days in receivables has encountered enormous growth. In the first year of operation in the Ukraine, days in receivables amounted to 36 days. In 1999, that number jumped to 85 days and in 2001 to 87.1 days. Oleg Pinchuk has projected the years of...