The impact of systematic changes in weather on the supply and demand of beverages

Abstract

Weather, especially temperature, plays an important role in determining the supply and demand for a vast variety of goods and services. Though the economic impact of extreme weather is often measured and reported, the impact of systematic changes in weather, such as long-term temperature trends or short-term heat and cold waves are seldom quantified. In this research, we posit that such systematic changes in temperature impact the profitability of firms, and we develop a two-step econometric model to quantify the impact. The proposed two-step model estimates the impact that temperature has on the profitability of firms and partitions this impact into a long-term and a short-term component. We take up the case of six liquid refreshment beverages (LRBs) for illustrating the impact that systematic change in temperature has on demand. The results indicate that (a) the demand for LRBs is increasing by about 0.21% (63 million gallons) from year to year on account of the rising temperature trend, and (b) there is an asymmetry in the effect of a heat wave versus a cold wave on beverage demand (i.e., the weekly demand for beverages increases by about 2.1% per degree on account of a heat wave while the weekly demand decreases by only 0.4% per degree on account of a cold wave). We also illustrate how these estimates of the impact of the long-term temperature trends could be linked to strategic decisions, such as facility location, and the estimates of the impact of the short-term temperature aberrations could be linked to operational decisions such as the inventory order quantity in a week when there is a temperature aberration.