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Impact of Weather on Retail Sales - Weather Sensitivity Analysis

If there is a suspicion that sales are affected by the weather it is a good idea to carry out a causal analysis to evaluate the impact of weather on retail sales and on demands occurring further down the supply chain.  The results can then be taken into account in demand forecasting.  At Forecast Solutions we use specialist statistical software to analyse the weather sensitivity of demand to quantify any causal relationship that may exist. 

Weather varies throughout the different seasons of the year, causing much of the regular annual variation that businesses understand very well and is usually described as 'seasonality'.  So sales of things like soft drinks, beer and lager, ice cream and salad dressings are known to be high in the summer, whilst demand for canned soup and baked beans is higher in the winter.  What tends to be less well understood is the effect of abnormal or 'unseasonal' weather and it is this element that we are striving to quantify in a weather sensitivity analysis.

Causal Analysis of Weather Sensitivity

Historical data on sales and weather, including measures of temperature, rainfall and sunshine hours, is employed in a causal analysis in order to identify the key factors that affect demand.  Reliable historical data on UK weather can be obtained from the Met Office or other suppliers.  One good alternative is WeatherNet, a non-governmental provider of weather history and on-line weather applications.

If statistical analysis proves there is a causal relationship we can quantify the impact of weather on retail sales and sometimes on demand for other products and services that may be further down the supply chain.  The findings can be used to improve the forecasting process.  There will then be a better understanding of the historical effects of weather and a more accurate future forecast can be made, even when a reliable weather forecast is not available (see below).

Weather Related Demand Forecasting

To make the fullest use of any causal factor in forecasting it is desirable to make use of an accurate forecast of that factor over the forecast horizon.  With weather data this is sometimes possible when making a very short term forecast directly of retail sales, but for companies further down the supply chain it can be more difficult.  For these companies there is often a need to make a somewhat longer term forecast in larger time buckets e.g. weeks rather than days, and a reliable weather forecast can be hard to find.  However, a causal analysis on weather can still improve the forecast through a better interpretation of historical effects. 

By way of example, consider a business that manufactures horticultural products.  Unseasonal weather definitely has an impact on retail sales in this market and there is also an important business-to-business channel in the form of horticultural growers.  If there has recently been a period of unseasonally high rainfall, sales will undoubtedly have dipped during the wet weather.  If the effect of that extreme weather is understood from statistical analysis, the sales history can be adjusted for the effects of weather prior to running a statistical forecast.  Then the forecast can be made on a weather-neutral basis and will not be pushed down erroneously due to the previous weather event.  So there is still a significant benefit to be derived even when a good weather forecast cannot be obtained.  

See some case studies on analysis we have done to quantify the impact of weather on retail sales.

Need for expert help

Although a basic causal analysis using the regression tool in Excel's data analysis tool set can give an initial indication of weather effects, specialist statistical software is usually necessary for a thorough analysis. One reason for this is that the various measures of weather such as mean, minimum and maximum temperature, sunshine hours and rainfall tend to be closely correlated with each other and are very easy to misinterpret.

Also, the likelihood is it will be necessary to include the possibility of time lags due to supply chain effects.  For example, for some businesses the effect of high rainfall in the current week might have a distributed effect across this week, next week, following week, etc.  This process benefits from the use of specialist software and, preferably, an analyst with a good body of previous experience .

Of course the weather is an integral part of market seasonality for many products.  Therefore great care is needed to avoid confusion of the results with natural seasonality or inherent trends in market size or share.  It is often necessary to seasonally adjust the historical weather data and/or historical sales to obtain the best understanding from the causal analysis. 

Forecast Solutions Planning has the necessary software, skills and experience for weather sensitivity and other causal analysis and can help integrate the results into an improved sales forecasting process.  We can also analyse the impact of other drive factors such as price sensitivity or the effect of economic indices, enabling us to build causal models incorporating several variables.