THE GUESSING GAME
To improve the accuracy of sales forecasts, some CFOs are tracking some rather unusual indicators.
By Charles Tan

Jeffrey Lim looks at the plump woman selling packed lunches in one of the staircase landings of his office building and he sees the future of his company. So long as the woman's business is brisk, Lim says, he is confident that revenues of SM Prime Holdings, the Philippines' largest mall operator, will remain strong. Since she is a member of the underground economy, the woman's earnings do not show up in any government statistics. But Lim says she is one of millions who will spend her profits in SM Prime's malls. Thus, seeing how her business performs helps Lim forecast revenues. "She (can) actually earn more than an ordinary office worker," says Lim, vice president for finance at SM Prime, "so her business is important."

Like Lim, many finance managers in Asia are turning to some rather unlikely sources to help them get a fix on sales. Some say these non-traditional methods of forecasting sales are just as reliable - if not more reliable - than the latest round of government economic indicators. Certainly, those indicators were next to useless in predicting the region's recent economic meltdown. The swiftness and severity of the Asian economic downturn caught huge numbers of CFOs by surprise. The traditional forecasting methodology - letting the past predict the future - was a total wash-out. Now, as signs of recovery are starting to sprout up, the guessing game is becoming even more important to finance managers in Asia.

But that game is no longer being played by the same old rules. To be sure, interest rates, inflation and income statistics form a valuable platform for predicting where sales are headed. But to get a better handle on risks that could unexpectedly hammer those sales, CFOs in Asia are now tracking such mercurial factors as currency fluctuations, political risk, changes in technology and the weather. Yes, the weather.

The Dismal Science

Crisis or no, forecasting has long been one of the most laborious - and unrewarding - parts of a CFO's job. Patrick Doh, CFO at Singapore-based Fraser and Neave (F&N), knows this well. "It's a lot of guesswork," he admits. "If we were so smart and we were able to get the exact figures, we'd be very rich now," Doh says with a grin. Jokes aside, Fraser and Neave, a US$1.7 billion-in-revenues a year beverage and property company, saw its sales drop an unfunny 9 percent last year, and its return on equity plummeted from nearly 10 percent in 1996 to just 1.5 percent in 1998. With operations scattered across Southeast Asia and Australia - and expanding westward to Nepal - Doh has realized that he now needs to zero in on which countries and markets offer the best opportunities to turn that trend around. "In some countries the demand has declined, in some countries it has surged forward. So we have to re-look at each country's economy," says Doh.

To improve this process, Doh now has his staff monitor employment figures in each market and to cull opinions from analysts and think tanks on how soon a recovery will take place. These numbers and views are then added to the traditional figures his staff have always assessed: gross domestic product, inflation and interest rates. Doh then puts the employment data, especially any significant retrenchment figures, alongside each country's recent interest-rate movements. Nothing affects disposable incomes faster, he reasons, than high interest rates. This new micro-forecasting system, he hopes, will allow Fraser and Neave to pour resources into the right markets, kick-starting company sales in the process. Indeed, Doh is confident enough in his forecasting to predict overall corporate sales will grow by 8 percent this year.

SM Prime's Lim spouts interest-rate fluctuations as if it were his mantra. "When interest rates go down, then there is a stimulus to spend," he says. As the Philippines' central bank has cut the country's key interest rate 14 times since January, Lim is optimistic economic activity will pick up this year. Banks that have been especially risk-averse since the crisis will likely resume lending, he says, stimulating domestic investments. That, in turn, should generate more employment and more spending. Still, like Fraser and Neave's Doh, Lim keeps a careful eye on employment figures. "If there is a high unemployment rate, this will makes us look back and see where we should be projecting our revenues," he says.

History is Bunk

In the years prior to the financial crisis, historical performance provided CFOs with most of the forecasting equipment they needed. "In the past, when the government showed that the economy grew by 2 percent and that there was an inflation of 8 percent, sales in our malls would increase by maybe 14 percent," says Lim. If interest rates dropped, Lim's team would add another percentage point to the sales forecast, he says.

These days, such an approach is nearly useless. Consider the impact of currency fluctuations, Lim says. The sharp drop of the Philippine peso nearly doubled the value of the US dollar. Bad news for mall operators? Not necessarily, according to Lim. The drop of the peso nearly doubled the remittances of the five million Filipinos working abroad. Much of their good fortune fell straight to SM Prime's bottom line. "Remittances affect spending in the malls because a lot of the dependents of overseas workers here basically use the money for daily living allowances, rather than for savings," says Lim. Not surprisingly, the SM Prime finance chief says he looks long and hard at exchange rates when making sales forecasts. Over the past months, the peso has been getting stronger. Lim says a "significant" appreciation would merit a downward revision of revenue targets.

No one knows the limited usefulness of historical assumptions better than Alberto de Larrazabal, CFO of San Miguel Corporation, the Philippines' largest food and beverage conglomerate. "We do have econometric models, based on projections for the economy, inflation and incomes," says Larrazabal. "These trends are useful in trying to determine relationships between overall economic indicators and potential demand," he says.

Factoring in the weather can be a bit trickier. Earlier this year, San Miguel's revenues fell afoul of the El Nino weather pattern. An El Nino-caused drought resulted in a 6.6 percent contraction in the Philippines' agricultural output, diminishing the incomes of rural residents, many of whom drink beer when the harvest is good. From January to March, San Miguel's consolidated net sales dropped by 2 percent because of the abstemious farmers and the drought's impact on the effects of the company's coconut oil milling business. Remarkably, weather forecasts now figure heavily in Larrazabal's forecasting models. In addition to watching the skies, San Mig has also begun monitoring other non-traditional indicators when making its forecasts. These include the rate of change in information technology, the moves of its competition and the lifestyles of consumers.

Just Outsource It

Still other CFOs are monitoring fewer indicators, not more, by outsourcing their forecasting. Take Nike Southeast Asia, which distributes the popular US-brand sports shoes in Asia. Nike's Singapore-based CFO Saw Kok Wei says he likes to look at retail sales indices where they are available. But Saw says he is more excited about his futures program, which is a scheme Nike devised to reduce its exposure to changes in consumer demand. Under the program, retailers place orders with Nike a full six months ahead of delivery. Nike then places the orders with its factories in the region. The method has two obvious benefits: it gives a more accurate picture of sales demand in each market, and it reduces Nike's inventory risk.

To reward its distributors for taking the risk of ordering shoes that far in advance, Nike Southeast Asia sticks with exclusive distributors in most markets, including the Philippines, Malaysia, Thailand and Sing-apore. Saw says the shoe maker also offers these distributors discounts on merchandise. "With the futures program, in return for the retailers placing orders with us before we place the orders with the factory, we give them a higher discount," he says. They are also assured of delivery. "The order has been placed for them and no one else can touch it," Saw explains. Officially, he says, no more than 10 percent of the orders can be cancelled. But this rule had to be stretched in a few cases recently.

As those exceptions prove, even outsourcing the forecasting function is far from foolproof. San Miguel's Larrazabal believes the secret to accurate forecasting may be the ability to combine traditional figures with less exact ones. "You have to be very focused on what's happening to the economy and what's happening to your competitors," he says. "But you must also understand what's happening to your consumers, their tastes and lifestyles."

Meanwhile, economists at the International Monetary Fund in the region are now predicting GDP growth in the Philippines will rebound to 2.2 percent this year. They may be right. Lim says the woman selling packed lunches under the stairwell has been doing a brisk business of late.

Charles Tan is a business and finance writer based in Manila.