Analysis: How the weather is changing retail

If there’s one thing bound to get retailers’ attention, it’s the weather. Sun, snow, rain or gales, they all have a direct impact on the bottom line and the consequences affect everything from merchandising to finance.

Which is why things might start to get more complicated for retailers if weather patterns continue to become more erratic – and evidence is starting to suggest they are. While scientists point out that it’s difficult to attribute any one weather event to climate change, they can show that the likelihood of some of these events is rising and the extremity is increasing. All of which is confounding retailers.

“The principle challenge facing any business is that we can’t know exactly what impact changing weather patterns will have on operations,” says Kingfisher group corporate social responsibility director Ray Baker. “We know that extreme weather conditions can increase insurance and maintenance costs and we know that long-term forecasts are for more extremes not fewer. Taking that into account we need to consider what we can control and what we can do now to adapt our business accordingly.” Not just in terms of operationally, but financially – for the first time this year, insurance costs for subsidence and flooding outstripped those for fire and theft at Kingfisher.

“A lot of retailers have the weather on their risk register,” says Deloitte head of sustainability services practice Guy Battle. “They’re watching this space. But a lot of them don’t know what to do about it.”

It’s a complex picture that isn’t yet fully formed and the response is likely to be complex too.

Food price hike

Perhaps the most pertinent consideration, particularly for food retailers, will be the upward pressure on prices after this summer’s poor wheat crops. Weather across the globe has been unusual this year – the US droughts, the wet UK summer and the Russian heatwave all contributed to rising commodity prices, and consumers are likely to see the effects in the coming months. The grocers will now face the same question fashion retailers faced in 2010 when cotton prices rose – whether to absorb the cost increases or pass them on to consumers, risking the loss of sales volumes and customer loyalty.

PwC chief retail adviser Christine Cross says: “I don’t think we’ve ever had as bad a hike on wheat as we are about to have. To date, retailers have absorbed the costs but now it’s hitting so many areas.” Wheat is also needed in animal feed, so other foods, from pork to eggs, are also likely to rise in price.

Not only is there a shortage of some crops, but the food that has survived adverse weather might not meet customer expectations. So called ‘ugly fruit’ is hitting the shelves everywhere from Morrisons to Sainsbury’s, and Battle says retailers might have to put time, effort and resources into marketing and selling fruit and vegetables that consumers would normally reject. “There’s a really important issue around customer expectations,” he says. “Retailers are inevitably going to need to help people understand the beauty in deformity.”

Blurring seasons

The food industry is bearing the brunt of climate-related problems this year, but there are longer-term issues to contend with as well – not least the effect of unseasonal weather.

Perhaps more than any other sector, fashion is driven by the seasons. It sells shorts, bikinis and sandals in the summer, and boots, coats and umbrellas in the winter. But a quick glance at the weather over the past couple of years suggests this seasonal approach is not sustainable.

In February 2012 UK temperatures jumped from -18C in the coldest part of the country to +18C in the second half of the month. A winter drought was followed by a very wet summer. And while the winter of 2010 was unusually cold, the November of 2011 was the second warmest since records began in 1659.

“In the UK we have very distinct seasons of fashion and everything is geared up around those seasons,” says Battle. “If there’s less differentiation around the seasons, what does that mean for the fashion industry?”

John Lewis head of merchandising for womenswear Christina Slater says flexibility in supply chains has become more important. She says: “As the weather has become increasingly unpredictable in recent years, we are aware of the need to be more flexible in planning when seasonal stock arrives in shops.

“I think we’re a long way off a move away from the traditional autumn/winter and spring/summer seasons, but the lines between the seasons are blurring. And although decisions about seasonal stock have always carried an element of risk, taking a bold position up front on weather-related stock appears to be getting riskier.”

Weather the storm

Zara is known for its formidable vertical supply chain operation that allows the Spanish fashion retailer to increase production of popular lines and drop less successful products, and Deloitte retail partner Toby Paxton says introducing vertical elements to a supply chain could help. Those without the funds for a major overhaul can make other changes. Sourcing closer to home, shorter lead times and not buying in bulk can all improve retailers’ ability to respond to supply disruptions. Paxton says this is happening anyway for many: “The economies that were obvious around long lead times and Far East sourcing are probably not so clear cut as they were.”

Slater says good supplier relationships have become more important, and spreading risk by using a wide variety of suppliers can help too. “The key thing is building strong relationships with suppliers so that if we are facing weeks of summer rain, as we did this year, we can respond quickly to those changes as they happen. The need to ensure a balanced supply chain with manufacturing bases in different countries, balancing margins and speed of response, is greater than ever,” says Slater.

The home and garden sector is another with key seasonal product lines – sales of barbecues and garden furniture in the summer rely on good weather to get shoppers into the garden. Baker agrees supply chain flexibility is crucial, but points out that climate change does bring some commercial opportunities.

“Climate change can present commercial opportunities in terms of developing products for customers that help them adapt to and mitigate against climate change,” he says. “For example, we’re working on water efficiency, particularly the sale of water efficient products at B&Q. Then there’s stocking flood-related products at relevant times of the year, such as sand bags and water pumps, which see increased demand at these times.”

On the high street, footfall is a main concern, as no one wants to go shopping when it’s pouring with rain or snowing. But retailers must be creative, says Neil Saunders, managing director at analyst Conlumino. “You can actually do something about this. Footfall is about immediacy, and today you have all sorts of social media tools to encourage people out and stimulate people into shopping,” he says. Offering 25% off for that day only, for instance, could mitigate the effects of the rain.

Ultimately, the weather has always been out of everyone’s control and that isn’t about to change. Saunders says more extreme weather will have to be factored into business plans and forecasts, and increased risk catered for. But no matter how much retailers plan, if weather patterns continue down their current erratic path, it will be wise to expect the unexpected.