Ensuring the forecast is mostly sunny

Michael Baker
March 13, 2013

PREDICTIONS
If you are an Australian business taking a concept outside the domestic market, the risk of being undone by overly optimistic sales projections is amplified.

With globalisation of the retail industry has come a wealth of opportunities for retailers to fly the flag in places they haven’t ever been, next to retailers they haven’t ever seen, domestically and overseas.

Big shopping centres, and in some cases stubbornly high vacancy rates leading to downward pressure on rents, beckon retailers in both mature and developing markets.

There will always be those who slurp the Kool-Aid, don’t pay for research, and still come up with the right answer.

Many smaller retailers take on the expansion process opportunistically. They make some contacts in the right places, check out the real estate, cut a deal and they’re off to the races, either opening stores themselves or franchising them. The financial analysis for new stores, assuming there is one, will include a forecast for operating costs and revenues. Operating costs are not so difficult to pin down since rent, labour and cost of goods are relatively transparent even when the expansion is into unfamiliar territory overseas or into another part of the Australia.

That means the whole profitability analysis swings on the soundness of the sales forecast. How can you as a retailer or franchisee ensure that the sales forecast is grounded in reality?

Sometimes a retailer in a new market outperforms expectations spectacularly. Yet many retailer expansions in Australia have become unglued by excessively optimistic sales projections. This applies both to home-grown concepts and foreign entrants. And if you are an Australian business taking a concept outside the domestic market the risk is amplified.

In cases of either outperformance or underperformance there can be a variety of causes for the sales forecast coming unstuck. Sometimes there has been a problem realistically assessing brand acceptance and the strength of the competition in the new location. Or there has been a failure to correctly forecast passing foot traffic or store accessibility and how these factors would translate into customers and sales.

Such errors can be minimised. There are never any guaranteed techniques for making sure a sales forecast is solid but there are certainly ways of reducing the risk of a serious miscue.

However, this usually means doing some scientific analysis and the people whose profession it is to do market research and come up with sales forecasts are not always held in high esteem by the retailer community.

There are reasons for this.

Expensive mistakes
For starters, good market research is perceived by many retailers as expensive. What the retailers don’t factor in is that the research, if done well, is actually very cheap relative to the cost of a mistake, such as opening a store in the wrong place or having the wrong-sized store in the right place, both of which can result in terminal underperformance.

The second reason for the dim view of research among many retailers is that the latter tend to believe their own gut feel for a market is more reliable. A retail entrepreneur may believe instinctively that since he understands the conditions under which he has been successful in the past he can continue to replicate that success unaided in the future.

The third reason is that traditional forecasting techniques are not that well suited to predicting sales of a product, brand or retailer that is new to a market. For example, forecasters love to use market data to estimate “total spending” on a product and then carve out of that a “market share” that the new product or brand can reasonably be expected to achieve.

This might work for hamburgers or mass market grocery chains but for a lot of other things it will get you to a wrong answer because innovative products, brands and retailers don’t really “share” markets – they create their own.

Another, more effective sales forecasting practice is with the use of analogues. Analogue forecasting involves understanding the factors that drive sales performance in a retailer’s successful locations and measuring those same factors in a proposed location.

This kind of forecasting must be modified when crossing international borders though. Across countries, there are differences in competitive intensity, retail formats, real estate quality, lifestyle and psychographics, all of which can render the usual income and population profile moot.
Good market research will be able to quantify the impacts of each of these factors and finish up with a sales forecast that isn’t pie in the sky.

Of course, there will always be those who slurp the Kool-Aid, don’t pay for research, and still come up with the right answer. If you’re one of those then you’re very gifted – and your research budget is about right.

Michael Baker is principal of Baker Consulting and can be reached at michael@mbaker- retail.com and www.mbaker-retail.com

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