Assumptions about a sales market

Over the years, much has been written and spoken about the importance of an ‘accurate’ forecasts of sales. But what if the underlying assumptions about a market are wrong, in which case, forecast accuracy has little meaning. And its the Supply Chains group that must clear the debris left behind when reality strikes.

This situation was discussed in a recent paper concerning the market for wine in China, which “has slumped as quickly as it had grown”, with the rider that “its boundless promise is matched with equally boundless uncertainty”.

Although the Chinese premier praised the health benefits of wine in 1996, it was economic factors which drove the market. China joined the World Trade Organization in 2001 and reduced the tariff on imported bottled wine from 65 percent to 14 percent. This was followed by trade facilitation agreements with countries that enabled duty-free access, including with Australia in 2015.

China wine market

The growth in demand for wine in China was driven, not by an appreciation for wine, but through individuals providing bottles of wine as gifts and presented at banquets. The ‘best’, which carried the most prestige, were red wines from Bordeaux, even though French wines have a high tannin content that does not suit the Chinese pallet. The sale of wine was therefore to trade buyers in hospitality (restaurants, hotels and bars), where sales of wine at Chinese New Year can be 30 percent of the annual revenue for some supplying companies.

It has been said that by the end of 2013, Chinese people were buying more red wine than the French. It therefore follows that the euphoria surrounding the rapid increase in sales for a product in a market can attach itself to many people. In addition to increased investments by wine exporting companies and their supply chains, the increase in demand from the mid-2000s, encouraged domestic investors to finance the expansion of production in China. Production is now less than 50 percent of 2016. The more exuberant Chinese investors purchased wine estates (with chateaus) in France, in the expectation of ever increasing sales. These estates are now for sale, with few interested buyers.

At the beginning of 2013, China’s new leadership took an anti-corruption approach, including luxury gifts, banquets and fine dining. This influenced a move away from sales of prestige French wine and by 2019, Australian wine producers had a near 40 percent market share, amid thoughts of even more. Then, a political dispute stopped the import of wine from Australia, its most profitable market.

Although projected to become the world’s second-biggest buyer of wine in 2020, China’s ranking dropped from fifth to sixth and in 2024 could be ninth. Exports to mainland China from the current top four countries (France, Chile, Italy, Spain) have been on a downward trend for the past six years. The overall sale of wine in China since 2017 has reduced by more than two thirds, so the reduction was not directly attributed to the COVID pandemic (although it made the situation worse), but could have been driven by political strategies.

Disruptions in supply chains

The outcome from changes in such a large market that producers had come to rely on have caused disruption at wine companies and through their supply chains – wine companies and vineyards for sale; fruit left on the vines as prices for grapes are too low; services to grape growers curtailed, packaging contracts reduced and unsaleable wine stored in warehouses. The warehouses are now being refilled in anticipation of sales to retailers for the 2025 Chinese New Year, but what product mix will that be, because the sales history is not a guide?

While it is easy to criticize past marketing and sales decisions, at the time it was assumed that the ‘gravy train’ of increasing sales would never stop. Have you ever seen a marketing or sales presentation where the sales graph slopes downward? Instead, sales forecasts will justify the original assumptions concerning increasing demand. For many consumer products, the total population of China was considered as potential consumers and the same mistake is happening concerning the potential sales of products in India.

Once there is sufficient momentum behind the assumption of ever increasing sales for a consumer product, often promoted by articles in the media, it is a brave marketing person who questions the figures. So they agree with the prevailing mood, especially if experiencing ‘peer pressure’ from their colleagues. This is called Confirmation bias, in which data and information is provided that supports what the audience (management) want to hear. Then the decision maker’s Cognitive bias (based on the affirmative inputs) influences their thinking concerning support or opposition for a scenario. Their subsequent comments can then influence other members of the decision-making group to support the growth scenario.

It is these biases that possibly enabled the management of wine companies to accept the original scenario concerning consumer preferences, market structure, buying patterns and the important political considerations, which annual sales forecasts then supported.

The market structure has now changed, There are approximately 50m (mainly male) red wine drinkers and potentially, women who enjoy white wine that pairs with Chinese food. Surveys indicate that more than 50 percent of these buyers prefer to purchase their alcohol using e-commerce platforms, so the commercial buyers (and relationships) have changed. But the buying demographic is 20-34 years old, where unemployment has increased, adding to uncertainty. So what are the sales forecasts?

This discussion has illustrated a situation where sales forecasts were supposedly good until they were not. But supply chains are structured based on the prevailing assumptions about the market and take time to change. This emphasises the need for Marketing and Sales and the Supply Chains group to meet in a forum where assumptions about markets – both sales and supply, can be discussed and a position agreed.

This is the role for Sales & Operations Planning (S&OP), a much maligned, misunderstood and often poorly supported process for parties in a business to agree on a course of action for the future. This approach will enable the Supply Chains group to achieve their objective of ‘Delivery in full, on time, with accuracy’ (DIFOTA) and to provide accurate and timely information to Nodes and Links in the Core supply chains.