Deutsche Brauerei

1

a. How does the company make money?

DB makes money by producing and distributing beer throughout Germany and the Ukraine. It provides a product that beer drinkers in its service area enjoy drinking and are willing to pay for.

b. What is its strategy?

It sells beer to distributors in Germany which then house and sell to retailers; in the Ukraine it has a different to market strategy in that in-country distributors do not exist so DB is handling the distribution function as well.

The company saw a low barrier to entry opportunity in Ukraine and is taking advantage of the fragmented beer market there. DB has also adjusted its payment terms in order to include small retailers within its customer base.

c. How has the company been doing?

2

Its German business is going well and providing steady, reliable income. The new business territory has generated many sales and the growth rate is strong but at an exorbitant cost in inventory and distribution expenses. However, the sustained growth rate is much lower than the actual growth rate. The company is growing much too fast to keep up.

What does the break-even chart tell us?

DB needs to produce __ HL to break-even

938,799

The break-even chart shows the break-even volume where revenues are equal to total costs. DB's break-even volume is between 900,000 and 950,000 HL of beer.

3

a. What does the financial forecast tell us?

The financial forecast clearly shows the stability of the German sales vs. accounts receivables. It also shows that DB is taking on substantial risk without much return. The total return on the investments in the Ukraine will actually be a drain on the total return from Germany. Based on the sustained growth rate staying at hovering around 2.5% to 3.5% compared to the actual growth rates int the double digits, it isn't a wonder that the company needs more money to move into the Ukraine. Compared to the actual growth rates int the double digits, it isn't a wonder that the company needs more money to move into the Ukraine.

Germany is experiencing slow, steady sales growth. Growth is occurring mainly in Ukraine. Accounts receivable in Ukraine is increasing rapidly. Inventories are increasing and short-term bank borrowings are increasing rapidly. There is a slight increase in Shareholders' equity.

b. What does the sources and use-of-funds statement tell us?

It clearly shows what is out of whack. ☺ The sources and uses statement shows us that the differences in accounts receivables between Germany and the Ukraine is very evident. On average over the 5 year period, Ukraine's accounts receivables is more than 6 times that of Germanys. We also see a large increase in inventory between 1999 and 2000. The projected numbers for the inventories in the next two years is suddenly much lower. With Pinchuks, credit and inventory policies for the distributors, and taking into account he plans on extending the credit policy for another 10 days, the projection of the inventory levels is not realistic. The Ukrainian distributors have no incentive to change the way they are doing business for the future.

4

What do you conclude from case Exhibit 7 about Deutsche's distributors in the Ukraine?

Deutshces' distributors are giving orders, but are not taking control of the inventory nor are they paying for the inventory in a timely fashion. Operating profit/sales numbers and pretax profit/sales numbers are lower than the industry as a whole. The day's sales outstanding are also much higher than the industry average. Exhibit 7 shows us that the distributors in Ukraine are more lenient regarding trade payables and inventory.

5

a. Are the credit and inventory policies in the Ukraine sensible?

The credit and inventory policies in the Ukraine are destructive for the company. Pinchuk tells Greta that "virtually all the retailers and restaurateurs we supply are expanding and enhancing their shops, buying modern equipment and restocking their own inventories..." If this is the case than why can't they pay on DB's terms? Why must the terms be relaxed so much?

b. What risks is the company assuming?

In