Weather determines what shall we wear and eat, how shall we travel, where shall we spend our holiday, even what shall we do every single day. Furthermore, weather affects four basic purchasing decisions: what, where, when (Agnew and Thornes, 1995) and in what quantity to buy (Kirk, 2005). Retail sector is not traditionally perceived as weather sensitive sector, so there are only a handful of authors who studied weather sensitivity in retail. Weather sensitivity or weather exposure can be defined as sensitivity of sale, production or costs to meteorological elements such as temperature, sunshine, rainfall, snowfall, wind, etc. If volatility of output of certain sector is caused by changes in weather, sector is said to be weather sensitive. Uncertainty in future cash flows as a result of uncertainty of future weather is defined as weather risk. Lazo et al. (2011) conducted a national study on weather sensitivity of the whole U.S. economy and found that 2.3% of retail output and 2.2% of wholesale output are weather sensitive. The overall weather sensitivity of the U.S. economy amounts to 3.4%. Retail sector shows low relative weather sensitivity compared to mining, agriculture and energy sectors. However, assessed by absolute terms, retail sector shows greater sensitivity than traditionally perceived weather sensitive sectors which offers a sound argument for weather risk management in retail.
Perceptions of weather effects on retail sales are somewhat divided. Many retail managers often blame weather for poor sales, but only some actively try to manage weather risk exposure given that many retailers offer diversified assortments thus mitigating weather effect on sales. That is why weather risk in retail needs to be further studied and discussed. The purpose of the paper is to give theoretical background as well as empirical findings on weather sensitivity in retail and to provide firm foundation for further studies on weather sensitivity in retail.
The rest of the paper is organized as follows. Next section describes the theories on the nature and magnitude of weather effects on consumer spending and retail sales.
Third section gives an overview of relevant empirical studies on weather effects in retail. Fourth section discusses the need for weather risk management in retail and proposes weather derivatives as potential risk mitigating tool. Fifth section gives concluding remarks.
The theories of weather impact on the consumer spending and retail sales can be divided into two groups. First group includes theories that explain the nature of the impact i.e. why and how weather affects the consumption and sale. Second group includes theories that explain the magnitude of the impact i.e. to what extent weather affects the consumption and sale. Furthermore, the impact of weather depends on whether the observed product shows strong seasonality in sales and whether it is a product that one really needs or would just like to have.