Weathernomics RETAIL Edition

Weathernomicsretail

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CONTENTS

introduction

Weathernomics: Retail - Ten Fundamental Truths

No One’s Talking About The Weather!

How Weather Affects Business Performance

Consumer Business Can be Disrupted

Examples of Hot and Cold Weather Impact on Consumer Demand

retail

How the weather impacts shoppers

The scale of weather volatility on the retail sector

Retailers’ financial results

Impact on different retail sectors

how can businesses address the issues?

the hot autumn of 2014

seasonal shopping

appendix

INTrOduCTIONWeather patterns are changing. more periods of abnormal weather, such as long periods of hot, cold or wet weather, and an in increase in the frequency of severe weather, such as snow storms or flooding, are taking place.

Unseasonal weather can have an enormous impact on UK businesses, just as much as extreme weather events. For many sectors of the economy - retail, transport, logistics, the utilities, leisure and food services - the impact of unexpected weather can be huge.

But commentators largely ignore the impact of weather on day-to-day business decisions and purchasing patterns. only the retail trade press and the retail sector itself acknowledge that ‘weather has a greater effect [on sales] than economic numbers, we’ve known that forever’ (andy street, John lewis managing Director, october 2014).

in the Usa, it’s more widely accepted that extreme and abnormal weather has a significant impact on the economy: a third of economic activity is believed to have some degree of weather and climate risk2 and the impact of weather variability has been estimated to be 3.4% of GDP3. this isn’t a loss but variability around the historical average weather conditions. of course, better weather forecasting is one of the best ways of reducing this variability.

Some business leaders talk about the weather. Some don’t talk about the weather. Some see it as not managing their business but are still very weather aware. Weather is such an important driver of consumer sentiment and activity. But it’s not as well

known and leveraged as it should be.

Paul Walsh, Weather and climate strategist, the Weather channel

Why is the impact of weather ignored in the UK? as an economic variable, weather fluctuates too much and is too unpredictable in the medium- to long-term to be built into most economic models. the marginal impact of extreme events is also seen as being difficult to measure and separate from other economic phenomena.

at the overall level, this may be true. But this is to mask many different – positive, negative and neutral – impacts of abnormal weather. and because of this, the impact of weather on business life is too often underestimated.

in 2013, an ons study concluded that ‘in terms of the retail sector’s sensitivity to the weather, past periods show a mixed picture with no clear relationship between the two’4. this, despite retailers pointing out publicly and in feedback to the ons that their sales were impacted by severe weather events, such as unusually high or low temperatures and heavy rainfall.

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NO ONE’S TalkINg abOuT ThE wEaThEr!

aCadEmICSeconomic textbooks don’t mention ‘weather’ unless ‘global warming’

TradE bOdIESthe British retail consortium (Brc) never comments publicly on the weather as a factor in retail sales

COmpaNy STaTEmENTSceos are reluctant to ‘blame the weather’ for business results. annual reports or press releases will rarely mention the impact of abnormal weather on results

rETaIl aNalySTSanalysts don’t use weather to predict retail sales: wage price inflation, lower fuel prices, PPi payments and personal borrowing are easier to forecast than the weather

gOvErNmENT STaTISTICIaNSthe UK office for national statistics (ons) has concluded there is ‘no clear relationship’ between retail sales and extreme weather

mEdIaBusiness reports in the media often reduce the impact of abnormal and extreme weather to easy-to-understand examples such as reduce the impact of prolonged warm weather to increased sales of ice cream and barbecues

wEaThErNOmICS: rETaIl TEN fuNdamENTal TruThS

1. Weathernomics: retail impacts the supply of products and services being available or sale in the right place at the right time. equally, Weathernomics: retail impacts shoppers’ demand for products and services.

2. in retail, good weather benefits high street shops. Bad weather benefits shopping centres. extreme weather benefits online.

3. Beware business results comparing weather with the previous year: a colder/wetter 2013 followed by a warmer/drier 2014 can give a distorted view of the difference. Use long-term averages.

4. abnormal weather will create both retail winners and losers. abnormally hot or sunny weather can be as negative as bad weather on a company’s revenues and profitability.

5. consumers react in three ways: postpone or bring forward planned purchases; respond directly by buying (or not buying) a product or service because of an immediate need or substitute the purchase of one product or service for another.

6. severe or extreme weather has less impact on retail sales than long periods of bad weather: 10 days of 3 inches of snow is much worse than 1 day of 30 inches of snow.

7. Business is very susceptible to seemingly small variations in weather: a seasonal temperature 1°c higher/lower than the norm can lead to a ‘disappointing’ quarter or annual result.

8. some parts of the retail sector are much more weather sensitive than others, and this is reflected in stock control: stocks levels of perishable fresh food is very different from the DiY sector where large stocks are the norm.

9. Being left with stocks of goods in anticipation of extreme weather is not necessarily bad. the normal course of business continues and excess stock can be built into the business model.

10. many companies have business models which complement both good and bad weather, such as B&Q which has outdoor and gardening goods and DiY.


Examples of hot and Cold weather Impacton Consumer demand

consumers postpone purchases , eg mild autumn and less demand for winter clothing or bringing planned purchases forward, eg warm spring weather for the DiY, garden and outdoor furniture sectors benefit

consumers’ response can be both positive and negative. extreme cold weather: heaters and clothing. extreme warm weather: cold drinks, summer clothing and sunglasses.

online replaces in-store purchases. indoorshopping centres benefit to the detrimentof high street shops and the switch to BBQ meats over roasting joints when the weather is fine

purChaSE TImINg

dIrECT rESpONSE

SubSTITuTION

Consumer business Can be disrupted In Three ways ■■

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Treatments for colds and flu

heaters, duvets, electric blanketsmintswinterwear (esp. overcoats, jumpers and boots)

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Soupmashed potatoesroasting jointsfrozen vegetables

COLDHOT

SubSTITuTION

dIrECT rESpONSE

TImINg

antihistamines for hay fevergarden plants, outdoor furniture

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prepared saladsSushiSausageskebabs

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Electric fansIce-creamSuntan lotionSummerwear

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how Weather affects Business Performance

abnormal and extreme weather affects both demand and supply of products and services. supply-side impact includes agricultural produce, utilities, construction and distribution. Demand-side impact tends to be more from the much larger service sectors such as retail sector, services, health and education.

But the impact of short spells of extreme weather can have a very different effect on business performance relative to long periods of unusually warm or cold temperatures: the impact of a two-foot snowfall that melts rapidly, or a torrential rainstorm, will have a very short-term if significant impact on business.

rETaIl

unprecedented Changes are Taking place In The retail Sector

CHECKOUT

Your shoPPing BasketdEClINE Of ThE hIgh STrEETshoppers are losing interest in physical shopping. the number of shops is decreasing year-on-year with one forecast expecting the number of shops to decrease by one-third between 2010 and 2020.

rISE Of dISCOuNTErS & CONvENIENCE STOrESconsumers are changing their shopping patterns away from large weekly supermarket shopping trips

rETaIl IS NOw ThEaTrErather than a functional purchasing point, retailers are a place to be entertained and educated, with a later purchase at home.

grOwTh Of ONlINEover 15% of the UK’s total retail market is already e-retail. a third of e-retail users are using click and collect services and m-commerce purchases were estimated to be £6 billion in 2013.

ImpaCT Of SOCIal mEdIasocial medial also continues to influence purchasing decisions: a quarter of non-food purchases influenced by the internet and 60% of big-ticket items are now researched online before purchase.


Estimated sensitivity to weather variability: retail sector

how the Weather impacts shoppers

the Portas review: an independent review of the future of the high street didn’t mention weather once.

so, how does the impact of weather feature in this ever-changing retail landscape? Psychologists believe that people are prone to inertia. For shoppers, when it’s raining or cold, it can be easier to shop online or in a shopping mall; when it’s warm, a stroll down the high street may be a more tempting prospect.

recent consumer research backs this up. almost 60% of shoppers change their shopping patterns when it is raining or hot. When raining, a third of shoppers shop less, while one in eight shop more – but in covered shopping centres rather than high streets. and 16% of shoppers say they switch to online when it rains5.

in large part, the success of shopping centres and the annual double-digit growth of online shopping can be attributed to the relative comfort of a shopping centre or home rather than the often wet and windy high street and the equally challenging journey there and back.

the scale of Weather Volatility on the retail sectorUs research published in 2011, estimated that 2.3% of retail sales are volatile to the impact of weather. apply this figure to the UK retail sector and it’s clear that the UK figures are large:

Market Size (£bn – 2013)

Food

apparel

home improvement

accessories/jewellery/luggage

consumer electronics

Garden and outdoor furniture

otc pharmaceuticals

Weather Variability (£m)

116

2650

37

850

160

7

54

1101009070

43

Sources: MarketLine for market sizes, 2.3% variability from U.S. Economic Sensitivity to Weather Variability, Jeffrey K. lazo, megan lawson, Peter h. larsen, and Donald m. Waldman (american meteorological society, June 2011)


retailers’ Financial results

retail ceos are praised or condemned for results where sales or profits rise or fall by a very small percentage point.

meanwhile, ceos rarely acknowledge the importance of weather on retail figures. John lewis managing Director, andy street, said in october 2014, “weather has a greater effect [on sales] than economic numbers, we’ve known that forever”6. this is in stark contrast to former ceos of Burton’s and m&s (ralph halpern, and michael rose) who believed “weather’s for wimps” when used as an excuse for financial problems7.

“Weather has a greater effect [on sales] than economic numbers, we’ve known that forever”. andy street, John lewis managing Director, october 2014

as with macroeconomists and government statisticians, weather rarely features in the analysis of retail analysts. the British retail consortium (Brc) never comments publicly on the impact of weather on retail sales and retail analysts are more comfortable explaining demand in the shops using more traditional and easily-forecast factors, such as wage price inflation, lower fuel prices, PPi payments and personal borrowing8.

Yet, retailers often report sales growth or decline on a quarterly basis. When just 13 weeks and 13 weekends are reported, sustained hot or cold weather, or even two or three wet weekends can have a significant impact on sales of some products or certain types or retailers. in september 2012, B&Q’s ceo announced that a wet summer had cost the group about £30m in first-half operating profit: sales of outdoor seasonal items - bedding plants, barbecues and building products - shrank and it was forced to embark on aggressive promotions to clear stock. average footfall was down in the UK as much as a fifth during the most severely affected weeks.

impact on Different retail sectorsFor different types of retailers, different periods of the year are critical to overall business success, and unseasonably hot or cold weather during these key periods can have a major impact on demand, or from a logistics perspective, on supply.

weather & retail

gardEN CENTrES

‘spring is their christmas’

apparEl/ClOThES

autumn and spring signal purchases of new clothes. Winter clothes, such as winter coats and boots, are bigger ticket items than clothes bought for the spring / summer season. hence autumn is of greater importance to this group.

ONlINE rETaIl

Primarily, electronics, some apparel and accessories, books and music. Greatest sales are now in the period between Black Friday (the day after Us thanksgiving Day at the end of november and christmas).

last quarter of the year.

aCCESSOrIES/ JEwEllEry

coughs and cold remedies, clearly the winter months while the UK’s 10-15 million hay fever suffers buy antihistamines in early summer.

OTC pharmaCEuTICalS

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hOw CaN buSINESSES

addrESS ThE ISSuES?

as both abnormal and extreme weather conditions have increased and continue to increase in frequency, how can Businesses address the issues involved?With up-to-date weather reporting, short notice decisions on media buying can help companies address the issues with immediate effect. online advertising is particularly suitable for last minute changes in content: emails, search engine, social media, online display and mobile advertising are all particularly adept at targeting key customer segments with new messages at short notice.

What Does the Weather have in store For retailers this summer?

the Weather company is forecasting average temperatures over the summer, and relatively dry conditions over July and august. however, when it comes to the weather, retailers tend to look at it year on year, often in line with their financial reporting.

compared to last year, temperatures will be lower than last year in July, but more favourable compared to august last year, which was the only month that was cooler than usual over 2014. august and the school summer holidays is a crucial time for retailers.

such weather over august should be a bonus for clothing and apparel, especially children’s wear and summer- and swimwear. Gardening and DiY should perform relatively well, with marginally above average temperatures and dry conditions, perfect for outdoor living; homewares and indoor furniture sales, by contrast, will struggle.

Generally speaking in terms of where people shop: high streets should benefit from a drier than usual period, whereas shopping centres and retail parks less so.

Warmer than usual conditions are likely to effect a rise in the number of people taking “staycations” in the UK, especially as southern europe is looking wetter than usual. this will be a boon for the UK retail market, driving people into retail outlets in coastal holiday destinations, comparing favourably to retail outlets in urban areas.

august - warmer than usual for most of the uk august – drier than usual throughout the uk

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getting it righthighlighting the diversity of weather-triggered applicability for retailers, brands such as Kathmandu, the co-op and asda are inserting their brand story into the weather forecast via the Weather channel’s pioneering native branded backgrounds.

as a result, brands are seeing significant increases in ctr and brand sentiment.

the solution

more and more brands are developing weather marketing strategies in order to manage environmental factors beyond their control. the concept of using historical and forecast weather data combined with industry-leading technology and analytics to really understand consumer behaviour delivers results.

retail brands work with the Weather company (the world’s largest weather data provider) to deliver contextually relevant, targeted advertising messages to drive marketing effectiveness, reduce campaign wastage and improve roi.

We see that even the most minor changes in weather affect consumer buying habits and by enabling brands to adapt their commercial message in real-time and at a hyper-local level, platforms such as WeatherFX offer a unique opportunity for competitive advantage to brands across all retail sectors.

Weather channel branded backgrounds, bespoke advertising solution.


ThE hOT auTumN Of 2014

the autumn of 2014 was about 1.5°c warmer than the long-term average (1981-2010)9.

clothing and footwear account for about one-eighth of all UK retail trade10. But the consequences for the UK apparel sector were an ‘absolute disaster’ estimated to be £700m for september and october alone11. Demand for winter clothing, including high-ticket items such as winter coats, knitwear and boots, which had been in store since late august were postponed until cooler weather at the end of the year. With excess stock in the shops, the consequences were felt not only during the autumn months but also for the rest of the year with heavy pre-christmas discounting.

not only were sales of clothing affected, profit warnings had to be issued by individual companies.

and this is not a one-off, a study of the hot summer of 1995 calculated losses for the clothing and footwear sector of £383m12.

hot autumn

The Impact of a mild autumn on the uk apparel market

sources: various Financial times articles sept 2014 – Jan 2015 and imgr press release (15 oct 2014)

sUPerDrYsuperdry reduced full-year profit guidance to £60-65m against analyst expectations of £69-73m

marKs & sPencerlike-for-like clothing sales fell 5.3% … the steep fall was exacerbated by the warm autumn weather. Without the warehouse disruption and unseasonal weather underlying sales would have been down just 1%.

DeBenhamslike-for-like outerwear trade fell 0.8% against analyst expectations of a 1% like-for-like sales increase.

John leWisFashion sales fell 13.1% and 6.9% respectively two weeks in the middle of september 2014.

neW looKlike-for-like sales from UK stores slowed from an increase of just over 8% to a 0.5% rise in autumn 3 months. the company has “not been immune from the impact on sales of higher temperatures this autumn”.

PrimarKUnderlying sales at Primark have been lower than expected over the past three months … [like-for-like] sales were below expectations since the start of its new financial year on september 14, amid the unusually warm autumn.

e-retailinGQ3 clothing e-retail increases 0.3% year-on-year. comparison: 13% average growth overall in Q3.


SEaSONal ShOppINg the retail calendar revolves around many increasingly prominent seasonal

events. some key retail dates in the calendar are immoveable, such as christmas, Valentine’s Day, and halloween. others vary to some extent: back-to-school, mother’s/Father’s Day and religious-based events, such as easter, Passover, ramadan and Diwali.

the uplift to the retail sector of these season shopping occasions is estimated to be in the region of £3 billion or about 1% of total retail sales13. not only do these events increase the number of shopping occasions, they allow retailers to create retail theatre as well as generating buzz on social media.

Unlike most purchases, purchases relating to these events cannot be postponed. the timing of products going on shelves, being prompted by advertising and price reductions, is critical to success.

consumer research estimates that when there is wet weather or snow, as many as a third of shoppers visit high street shops, or redirect their shopping to shopping centres and online. in such circumstances, short-term weather forecasts can be game changers for retailers, not just forecasts at a national level, but also at a local level too. the ‘wrong’ weather may leave suppliers with large stocks of unwanted product whether chocolates, flowers, easter eggs, halloween costumes or fireworks.

halloween 2014 best exemplifies the importance of short-term weather forecasts on marketing activity. the warmest halloween on record, the positive impact on sales was clearly tangible. at Waitrose, sales of halloween products increased 41% on the previous year: pumpkins increased 20%, halloween-related sweets increased more than 50%, apples up 14% and witches’ hats up 22%.

Seasonal shopping

weathernomics: retail - in numbers

41%increase in sales of halloween

products at Waitrose during warmest halloween on record, 2014

magic temperature when UK ice-cream sales can increase ten-fold over winter sales

18°C

1.1°CDifference between hottest year on record (2014) and long-term average

Drop in footfall at B&Q DiY stores during wettest weekends of 2012

-20%

Decrease in demand for domestic gas in 2014

-16.7%

Shoppers who tend to shop less when it’s raining

33%

15mhay fever sufferers in UK

£324mEstimated cost of hay fever to British businesses

1300Flights cancelled at heathrow airport if closed for one day

£700mlost sales in clothing as a result of warmest autumn on record

£500-900mFluctuation in profits of domestic gas suppliers between a warm and cold winter

£3.200mCost of summer floods 2007 to UK economy


about the Weather channel

the Weather channel (tWc) is part of the Weather company, the largest provider of weather data in the world - trusted and accurate, it is depended upon by leading airlines, global banks, the military, utility companies, retailers, top media properties and power marketers every day.

it the advanced science and data technologies that are at the tWc core - processing around 20 terabytes of data every day: wind, snow, rain, UV, pressure and humidity, which is the equivalent of 20,000 copies of the encyclopaedia Britannica.

tWc is growing globally through its consumer forecasting and lifestyle websites and mobile browsers that support 37 languages, along with its suite of smartphone, tablet and smarttV apps.

having access to the best weather data out there, tWc offer a compelling opportunity for a wide range of companies, with thousands of businesses already using weather to drive their supply and demand chain.

contact us for further insights on utilising weather data to maximise gain and minimise loss.

e: [email protected]: 020 3705 1924

Follow us: @tWcUK_ads

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lEadINg COrpOraTE dEparTmENTS aNd CIvIl aNd mIlITary avIaTION

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appENdIx

1. verdict, 2014 - £307,126m at current prices2. dutton, J. a., 2002: Opportunities and priorities in a new era for weather and climate services. bull. amer. meteor. Soc., 83, 1303–1311. p. 1306 3. The aggregate dollar amount of variation in u.S. economic activity associated with weather variability. U.S. Economic Sensitivity to Weather

Variability, Jeffrey k. lazo, megan lawson, peter h. larsen, and donald m. waldman (american meteorological Society, June 2011)4. How sensitive to the weather is the retail sector? retail Sales, ONS, Nov 20135. Seasonal Shopping, mintel, may 20146. retail week, Oct 29, 20147. This is a bit of a misquote: he was quoting ralph halpern of burton’s when michael rose worked there. but it’s generally attributed to michael

rose.8. kantar quoted in retail week,14 Nov 2014 and The retail forecast for 2015-2016, Centre for retail research, 26 Jan 20159. The met Office10. a Quick guide to the retail Sales Index version 2.2, Office for National Statistics, October 201411. Subak, S., palutikof, J. p., agnew, m. d., watson, S. J., bentham, C. g., Cannell, m. g. r., hulme, m., mcNally, S., Thornes, J. E., waughray, d., and

woods, J. C. (2000). The impact of the anomalous weather of 1995 on the u.k. economy. Climatic Change, 44(1):1–26.12. Seasonal Shopping, mintel, may 2014

Footnotes

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Weathernomics RETAIL Edition