By: Dave Frieberg, Planalytics
Spring has arrived! That means shoppers are flocking into stores to load up on gardening products, shorts, sandals, grilling supplies and other seasonal merchandise. The winter doldrums are over and sales of full-priced spring items are ramping up rapidly!
If only it were so easy.
Of course, the official start of spring is just a date and it is really Mother Nature who triggers changes in consumer behavior and determines when the transition to a new season actually occurs. The weather varies considerably each year, often taking retailers by surprise when the season arrives “early” in some regions and weeks “late” in others. The weather also affects other important attributes of the season — from its overall length to when sales peak to the relative strength of sales.
Weather trends — and their impact on businesses — are only the same from one year to the next about 15 percent of the time. This results in a lot of year-to-year variability that translates into substantial revenue swings.
Weather sensitivity analytics identify the percentage of a total sales affected by the weather. These insights are calculated across categories, by week and by market, from years of historical sales and weather data. A look at the March-April-May period for three retail sectors illustrates just how much revenue Mother Nature “puts in play” each spring:
Home centers and hardware stores: $4.1 billion
Apparel and accessory stores: $3.0 billion
Department stores: $2.9 billion
Those are big total business impacts. Drilling down to a product like lawn fertilizers illustrates how extreme the swings can be at a department or category level. In March, its weather sensitivity is 19 percent nationally, jumping up to 43 percent in Chicago.
How do retailers handle this volatility in their plans? Most ignore it and by doing so end up chasing last year’s weather in their sales forecasts. By failing to address the weather impact that is “baked into” last year’s sales, retailers add substantial error to their forecasts, essentially assuming the weather will repeat itself. It rarely does.
Retailers that “weatherize” their businesses fare much better. Weather-Driven Demand insights allow them to precisely quantify weather’s impact and remove it from historical sales. The resulting adjusted baseline (not a weather forecast) is four to five times more effective at identifying when and where there will be opportunities and risks compared to last season. Weatherization brings sales forecast accuracy improvements of a couple percentage points at the total business level and 10-25 percent gains across most seasonal categories.
Retailers typically recapture 10 to 40 basis points of total revenue through the reduction of inventory carrying costs and lost sales alone. For example, a $10 billion retailer could realize $25 million in annual profit enhancement. This is “found” money that is otherwise unintentionally wasted each year. And this number keeps expanding as the forecast improvements are used to optimize staffing, digital marketing and other business activities.
Welcome to spring! Even though snowflakes are still falling in some areas, warm weather will eventually arrive everywhere. Just don’t expect the spring season or the rest of the year to unfold like it did in 2014.