Put a Number on the Weather’s Impacts to Improve Performance
The Retailer Winter 2018/19
Retailers can increase sales and add 2-6% to the bottom-line annually by correcting for weather volatility in their plans.
There is no shortage of external factors pressuring retailers. From cautious consumers in an uncertain economy to the increasingly competitive and rapidly changing shopping habits, retailers face challenges that reside mostly, if not entirely, outside of their control. Whilst many of these externals will slowly evolve or may eventually fade away over time, there is a perennial influencer that retailers will always have to contend with – THE WEATHER.
No outside variable has the ability to change purchasing as frequently, directly, immediately, or meaningfully as the weather. Footfall and sales can change dramatically between a cold, grey Saturday and a warmer, bright Sunday. The weather never stops changing and it never stops affecting consumer buying behaviour.
The weather is much more than an occasional nuisance or wildcard that affects turnover and profit, and it is a mistake to assume that only a handful of events (e.g. snow, flooding, record-breaking temperatures, etc.) matter in the end. The reality is that most companies will see about 90% of their weather-driven sales variability come as the result of normal, everyday changes in the weather. The fact that spring started three weeks later, the summer had more rainy days, or that cooler temperatures arrived in September rather than November – these are the conditions that significantly affect performance and the decisions retailers make as they move through the year or trading season.
MEASURING AND MANAGING THE WEATHER’S IMPACTS
Obviously, the conditions outside often alter the consumer’s mindset and spending patterns on a daily basis or from one week to the next. A less obvious reality for retailers – and one that presents huge hidden costs – is how the weather changes from one year to the next.
Year-to-year weather volatility is actually the norm and, when ignored, retailers unknowingly introduce significant error into their plans and avoidable costs to the business. Why? More than 80% of the time, the weather’s sales impacts across a company do not repeat from the prior year. For example, retailers are likely to find a less favourable environment in the specific locations and weeks where Mother Nature gave a strong boost to sales a year ago and vice versa.
With it common for many retailers to base or heavily weigh plans on last year’s results, it is not hard to see how a planning process that leaves weather volatility unaddressed and embedded in historical sales creates problems. When weather-biased sales are left uncorrected, retailers end up with inventories that are misaligned with consumer demand and this leads to increased risk of out-of-stocks and lost sales as well as bloated inventories that can result in higher markdown or wastage costs.
Retailers can extract a significant portion of this unnecessary error from their plans by utilising analytics to “put a number” on the weather’s impacts. Weather data and meteorological forecasts alone will not suffice. A retailer really needs business-friendly metrics, based on how their specific customers spend, that can be applied easily and consistently to existing processes rather than raw temperatures, rainfall amounts, etc. For example, Planalytics has worked with retailers to develop Weather-Driven Demand calculations to identify precisely how the weather influences demand (which will vary across products, locations, and times of the year) and put a number on the weather’s impact either as a percentage or unit volume.
To address the issue of weather impacts not repeating year-to-year, Weather-Driven Demand is used to quantify when, where, and how much the weather inflated or deflated last year’s sales for individual product categories. When used to correct planning baselines for weather distortions, retailers commonly realise an annual, enterprise-wide planning accuracy improvement around 5%. For certain products and time periods, accuracy improvements can be 20% or more. Through inventory optimisation gains alone (reduction in lost sales and inventory costs), retailers typically capture 2-6% in additional profit annually.
INCORPORATE WEATHER ANALYTICS IN SPECIFIC PROCESSES TO MAXIMISE BENEFIT
The weather is changing all of the time. But retailers cannot spend all of their time monitoring and reacting to it. In fact, with the right analytics, companies can move from thinking about the weather too much to not having to think about it much at all.
The key is measuring the impacts broadly across the business and integrating or incorporating Weather-Driven Demand metrics directly into pre-season planning and allocation, replenishment, or digital marketing systems and processes.
Limiting the scope to a handful of products or sporadically making manual adjustments to different parts of the business severely limits the benefits a company can achieve. Ideally, a retailer will understand exactly how weather-sensitive sales are for their entire range and then apply weather analytics to any products that are significantly impacted. By scaling and systemically incorporating the analytics to all products that can benefit, retailers adopt a comprehensive, data-driven approach to optimising allocation plans or replenishment forecasts (or other processes) for never-ending weather changes.
Integrating Weather-Driven Demand metrics into data warehouses and existing solutions ensures that the weather is being addressed consistently and objectively and that opportunities to drive sales or mitigate risks are not being missed. Leading retailers are doing this today and maximising the value returned to the business.