Purpose
Retailers have long been aware that weather affects the sales of a myriad of products, but until now, most were not in a position to manage the risks weather presents. Rising weather variability combined with advances in weather-index financial instruments have prompted new interest in investigating the relationship between sales and weather. The purpose of this paper is to explore the impact of changes in weather on UK retail sales, to estimate the contribution of weather to sales, and evaluate the maximum potential loss caused by adverse weather, for each season and retail sector.
Design/methodology/approach
The authors present a methodology to identify and quantify the extent to which a company is exposed to weather risks, in order to incorporate them into its risk management policy and take actions to mitigate these risks. For each season and each retail category, the authors provide a measure of the impact of weather on sales that can be used as a benchmark to analyse sales performance.
Findings
The authors propose a new risk assessment indicator to evaluate the potential losses caused by adverse weather (WeatherRisk). The authors show that intra-annual changes in weather significantly affect retail sales. The exposure of retail categories to weather are not the same depending on the season, and the response of individual retail categories to the same change in weather varies considerably. Although temperature is a predominant explanatory variable, the authors show that weather-sensitivity analysis should include precipitation, humidity rate and wind.
Research limitations/implications
One limitation of this study is that the authors individually compute WeatherRisk for each significant weather variable. Further research could explore new approaches to evaluate Total WeatherRisk, which take into account potential multicollinearity issues between weather variables.
Practical implications
The methodology allows retailers to measure the effects of weather on sales performance, evaluate the risks at stake, and protect sales and margins from weather risks, with newly available index-based financial instruments. Managers may now actively use weather as a differential advantage, and at the same time focus their efforts on improving resiliency to increasing climate variability.
Originality/value
In this paper, the authors produce a detailed analysis of the exposure of each retail sectors to unseasonal weather. This is the first time all retail sectors are analysed and ranked per season at a national level. The authors provide managers with actionable information to improve their understanding of how weather impact sales over each season, and to allow them to structure weather-index-based instruments with financial partners.
