Weather impact on retail sales: How can weather derivatives help with adverse weather deviations?

Abstract

Weather affects four basic purchasing decisions: what, where, when and in what quantity to buy. Retailers are familiar with general impact of weather on consumption and consequential seasonality in retail sales, but lack detail knowledge about precise relationship between weather and sales needed for operational, strategic and financial decision making. Using the non-alcoholic beverages as an example, we conduct thorough weather sensitivity analysis in large food stores and propose design of customized weather derivatives as tools for offsetting failed sales due to adverse weather. We use method of panel which can be generalized to other product categories and other weather sensitive industries. Results show that weather sensitivity of beverages sales varies between months, implying the need for different weather risk management strategies, and that non-alcoholic beverages are bought impulsively rather than planned.