Retail & Recreation

Weather is a Player in All Markets

Weather impacts retail and business, such as clothing selection, leisure, and consumer purchases.  It can even influence home improvement project choice and outcomes.

Weather’s ever-present hand can create an unpredictable marketplace. Today, businesses should utilize weather risk management planning, and lessen the negative effects of weather on performance.

Within retail and business, an ignored fluctuation in daily, weekly, and seasonal weather patterns can lessen predicted sales or increase costs.

An adverse day or period (a day or duration when weather is not optimal for the season) can play a critical role in revenue loss.

  • Clothing retailers are challenged by a warm fall when new winter lines are released
  • Home improvement stores underperform in a cool spring when outdoor projects stall
  • Cold beverage sales are sluggish during a cool summer
  • Ski resorts have substantial revenue loss during a warm and dry winter
  • Outdoor events have diminished attendance on rainy days
  • Extreme weather prevents consumers from visiting brick and mortar stores and restaurants

Weather Risk Management Planning

Three steps to reduce weather-related losses.

  1. Identifying what is adverse weather for an industry or business is the first step in weather risk management planning. It can begin in the form of an anecdotal assumption or a more refined hypothesis.
  2. When adverse weather conditions are defined, further analysis can identify additional weather sensitivities and correlate these to business losses. Correlation and causation studies are performed to align weather variables/scenarios (weather indexes – time, space, and parameter flexibility) with underlying business metrics (e.g. revenues, units sold, costs, margin, etc.)
    • Throughout the analysis, it is critical that the client is intimately involved in the process. Feedback is necessary to ensure identification of financial exposures and goals are aligned with desired results. (The client must accept the result as being accurate, logical, effective, and significant.)
  3. Once the adverse weather is identified, education and research processes result in identifiable and actionable steps to reduce weather-related losses.
    • A business can now make informed decisions on how to mitigate weather and climate exposures. Linking weather indexes with business performance allow for the optimal risk transfer pathway (hedge strategy).

Weather Indexes

Adverse Periods (days to seasonal) 
Research determines that changes in ice cream consumption can be best explained using daily maximum temperatures
The investigation of the sales data reveals an estimate of the sales losses on such days

With the analysis linking weather to sales, IceCreamCo can effectively pursue the purchase of a weather index derivative structure or insurance policy to lessen the potential financial loss.

Though this example focuses on too many poor business days, solutions can also be devised to transfer risk when weather events fail to occur (lack of advantageous weather days).

Examples of Adverse Period Risks:

  • Zoos have diminished attendance on hot, cold, or rainy days throughout their operating season
  • Consumer purchases for snow-related products (e.g. snow blowers, snowmobiles, etc.) diminish due to lack of snowfall
  • Cool and wet summers reduce consumer motivation to buy boats and other recreational watercrafts
  • Restaurant loses clientele on critical winter days due to snowfall, ice, or extreme cold
  • Attendance at theme parks is negatively impacted by wet or cool days

Hours and Specific Days

If the presence of the adverse weather conditions cannot be tolerated at all, a business or entity will look to transfer risk stemming from low attendance (revenue reduction) or outright cancellation (revenue elimination). Adverse weather is defined and risk must be transferred on a specified date or range of dates.

A business must work through the weather risk management process to identify, educate, and research to successfully mitigate their risk. For optimal risk transfer through weather indexes, a client’s financial information must be included to identify a tolerable risk level.

Examples of Hourly and Specific Day Risk

  • A rainout for a popular sports match means rescheduling with increased cost for the venue–the rescheduled event required additional promotion and advertising
  • It rains during the headliner’s performance at a fair
  • A storm disrupts a youth sports tournament
  • Anomalously warm temperatures during a limited-time winter apparel sale
  • Cold and wet weather occurs during a highly advertised spring home improvement sale—demand cannot be recouped
  • A jewelry store offers a promotion that if it snows 3 inches (≈7.62 cm) on Valentine’s Day; they will refund all purchases made between January 1 and January 31st