DEUTSCHE BRAUEREI

Case Analysis Report

I.

Introduction
Deutschebrauerei is a business owned by the Schweitzer family. It was founded by Gustav
Schweitzer who graced the label of each bottle of beer. It began its operation in the year 1737 in a
village just outside Munich, Germany. It produces two (2) varieties of beer: Dark and Light. The
company markets its products through a network of independent distributors. Those distributors will
then sell the products to their customers at the retail end of the distribution chain like stores,
restaurants, hotels, etc.Its products are the main reason of the companys successwhich enables the
company to win quality awards over the years. In 1994, because of the fire that destroyed the
companys equipment for production, they decided to acquire new equipment and that equipment
enables the company to increase its production capacity and efficiency which left them an unused
capacity which was remained unused until 1998. Because of the excess production capacity in
Germany, the company decided to expand to Ukraine mainly because of its large population,its
strategic location within the Central and Eastern Europe and also because it has been viewed as
having easy entry opportunities.
Deutsches beer was launched in Ukraine in the year 1998. Accordingly, Lukas Schweitzer was
confident enough to hire Oleg Pinchuck, a Ukrainian local expert, to become Deutsches marketing
manager against other Ukrainian beer producer.The latter decided not to adopt the means of
distribution of Deutsche in Germany. Instead, he decided to create his own marketing strategy. Since
the beer-distribution in Ukraine was nonexistent and the terms applied in Germany couldnt be beared
by the distributors in Ukraine, Oleg, being the marketing manager, decided to extend credits to
Ukrainian distributors and relaxed payment deadlines to 80 days instead of 40 days as applied in
Germany. He also plan to relax the payment deadline to 90 days. His strategy also involves carrying a
large part of the distributors inventories to the companys books. Deutsche, for a not so long time,
was able to gain popularity because of its taste and quality. Given the depreciation in the Ukrainian
hryvna, the company was competent enough to increase Deutsche brauereis volume sales that can
offset the decrease in value of the local currency.
By 2001, Ukrainian sales accounted for 28% of the total Deutsche brauereis sales.

II. Statement of the Problem

Should the board of directors approve the adoption of the financial plan for 2001?
Should the board of directors approve the proposed increase in dividends for the quarter
to698,000 which is of the projected annual dividend payment for 2001?
Should the board of directors approve the proposed increase in Olegs base salary to
48,500and the increase in Olegs incentive payment to .6% of the annual sales increase in
Ukraine?

1
Magbitang, Redilyn B.
Talucod, Regine Marie D.
Papa, Richelle Angeline O.Taedo, Pauline D.

III. Industry Analysis

SWOT Analysis

STRENGTHS
Currently, the company has large market share and accordingly, a large market size. It has
been profitable because of its high quality products and strong brand image. With that, the
company were able to make their costumers patronize their products. Another advantage of the

2
Magbitang, Redilyn B.
Talucod, Regine Marie D.
Papa, Richelle Angeline O.Taedo, Pauline D.

company is their location. Since in Ukraine, they were able to market their products in a strategic
location which is within the Central and Eastern Europe.
WEAKNESSES
Because of the companys current strategy of providing capital to their distributors in Ukraine,
the company relies on debt financing and this strategy also results a large investment in accounts
receivable that brings the company a risk of increasing its bad debts expense. Longer terms of
trade were also provided to the Ukraine distributors. Giving high dividend to the stockholders
results to a low retention ratio of the company simply because they want to support the older
relatives that already retired.
OPPORTUNITIES
In terms of opportunities, Deusche has an opportunity of expanding overseas. Also they
experience a favourable shift in DMs current exchange rate.
THREATS
The company is operating in different countries therefore global recession may harm its
operations and profitability. Default probability of distribution channel in the countries where the
company operates is also a threat.

PORTER Model

FIVE FORCES ANALYSIS

4

THREAT OF NEW ENTRANTS (MODERATE)

The company has a moderate threat of new entrants because consumers tend to practice the
culture of brand loyalty wherein they are patronizing the brands that they are used to and brands
that is known to have a high product quality.Also, distribution channels were scattered in different
countries and in different places in a particular country that makes it easier for the consumers to
avail their products.
THREAT OF SUBSTITUTE PRODUCTS (LOW)

3
Magbitang, Redilyn B.
Talucod, Regine Marie D.
Papa, Richelle Angeline O.Taedo, Pauline D.

Beer per se do not have any substitute. Another brand may enter the market but the beer
itself do not have a substitute product.
BARGAINING POWER OF CUSTOMERS (MODERATE)
The company has a moderate bargaining power of customers. Its consumers switching cost
happened to be low which would make its buyers power to be high. However, the companys
differentiation strategy that markets unique products for different customers moderates the
consumers bargaining power.
BARGAINING POWER OF SUPPLIERS (LOW)
Low switching cost on the companys part give the suppliers a low bargaining power because
the company may change their supplier without incurring additional fixed cost.
INTENSITY OF COMPETITIVE RIVALRY (HIGH)
Having a fragmented industry wherein no single or particular company has a large enough
share of the market to influence the industrys direction, the competition in this industry is high. A
highly competitive industry has in return low entry barriers and low exit barriers.
IV. Alternative Courses of Actions
Deutsche Brauereis growth driver
Currently, the companys rapid growth in recent years is said to be attributable to its expansion in
Ukraine through distributorship, as an outgrowth of aggressive credit and inventory policies. The
analysis would also result to a large gap between the past and the projected performance because of
the optimistic assumptions about the sales growth given that the company increases its volume of
production above the break-even point.
Approval of Financial Plan for 2001
Due to the need to set up distributorship in Ukraine, the company gave the willing entrepreneurs
that do not have the sufficient capital a credit policy that is a bit more relax than the usual policy that
the company gave to their existing distributor. They give those new distributor 2 percent 10, net 80
compared to the original term 2 percent 10, net 40. To make it simple, the company provides capital
to their distributor by borrowing in a bank and then lending it to the distributor as form of receivables.
Such kind of investment and risk demands a high return. From the exhibits, it looks like that the
investment will generate the company a 120% to 130% return from the marginal receivables. This
results might look deceiving but, we have to consider the fixed assets and inventory adjustments that
still results the returns 26% and 26%, respectively, for 2001 and 2002. Though this two figures were
still higher than the cost of borrowing, the company should have to consider other factors like bad
debts, since the company would likely be increasing its receivables. Another, is cost of fund because
the company would have to make sure that the risk of lending the money to its distributor is less than
the risk of borrowing money from the bank. Next is the time value of money and last but not the least
is the country risk because the company basically does not operate in one country alone, and the
constant change in the policy in each country where it operates may affect its profitability as a whole.
To sum it up, the Ukranian expansion appears to be a profitable activity for the business. The
degree of its success will depend on how the people manage the risk and to formulate a financial
policy that would carry the firm until the growth option matures.

4
Magbitang, Redilyn B.
Talucod, Regine Marie D.
Papa, Richelle Angeline O.Taedo, Pauline D.

Dividend Declaration
Dividend Payout
Net Income
Dividend
Retained Earnings

Shareholder's
Equity
ROE

25%

50%

75%

2001
3,724.0
0
931.0
0
2,793.0
0

2002
4,311.0
0
1,077.7
5
3,233.2
5

2001
3,724.0
0
1,862.0
0
1,862.0
0

2002
4,311.0
0
2,155.5
0
2,155.5
0

2001
3,724.0
0
2,793.0
0
931.0
0

2002
4,311.0
0
3,233.2
5
1,077.7
5

31,183.0
0
11.94%

34,416.2
5
12.53%

30,252.0
0
12.31%

32,407.5
0
13.30%

29,321.0
0
12.70%

30,398.7
5
14.18%

The table above shows the analysis of the dividends declaration made by Deutsche. Rather than
relying on bank borrowings, the table shows that the company should retain more earning to cover
their borrowings and also to finance projected investments.
Salary Increase
Lukas Schweitzer proposed to raise the base salary and the incentive payments of the marketing
manager, who is Oleg Pinchuk, because the he thought that the latter is contributing positively in the
company especially in terms of its profitability. However, Lukas fail to consider the strategy that Oleg
is practicing in the latters sales strategies. Oleg set up a credit policy that is too risky for the company
for the sales to increase that much. It is like he purposely think of a way to increase the sales so that
his incentive payment will increase also. In that case, we think that it is not proper to raise the salary
and incentive payments of Oleg that much high because it has been analyzed that he is not
contributing much in the profitability of the company, instead, he is adding the risk of the company.
V. Recommendation
As for the approval of the proposed 2001 financial budget, it is more appropriate to consider
factors like the early stage of the beer market in Ukraine. It would be best to become more
conservative in terms of the expansion plans. It would be an added risk to the company if they will
allot such large amount of money. Instead of relying on loans, Deutsche should consider waiting until
they were already able to fund the planned expansion themselves.
As for the proposed dividend declaration for 2001, traditionally, Deutsche aimed for a dividend
payment of 75% of earnings for each year. Lukas suggested the 2001 first quarter dividends to equal
the of the earnings for the full 2001 year earnings projections. Supported by the computation
above, it would be better if the company retains its payout at 75% of earnings because at 25%
quarterly, the companys ROE will decrease to11.94%.
As for the proposed salary increase for Oleg Pinchuck, it is not efficient if the company will
immediately raise Olegs compensation. It is fair and just to increase Olegs salary because of his
contribution in the company which enables the company to market its products to Ukraine. However,
it has been analyzed that the marketing strategy implemented in Ukraine was not really helping the
company but actually harming the company. It seems like the marketing manager implemented that
strategy for his own benefit, which is for him to get more incentive payments.

5
Magbitang, Redilyn B.
Talucod, Regine Marie D.
Papa, Richelle Angeline O.Taedo, Pauline D.