International Journal of Retail Management and Research (IJRMR) ISSN 2277-4750 Vol. 3, Issue 3, Aug 2013, 1-10 © TJPRC Pvt. Ltd. ON WEATHER SENSITIVITY IN RETAIL INDUSTRY IVANA STULEC Department of Trade, Faculty of Economics and Business, University of Zagreb, J.F. Kennedy, Zagreb, Croatia ABSTRACT Weather affects four basic purchasing decisions: what, where, when and in what quantity to buy. Even though retail sector is not traditionally perceived as weather sensitive sector, results of studies show that weather has significant effect on store traffic and sales of many product categories and store types. That is why further studies and discussions on weather sensitivity in retail are needed. The paper gives an overview of theories on the nature and magnitude of weather effects on consumer spending and retail sales. Further is given the review of study results on weather sensitivity in retail and weather derivatives are presented as a new tool of protection against adverse weather effects. The purpose of the paper is to raise awareness about weather risk in retail. KEYWORDS: Weather Risk, Weather Sensitivity, Retail, Weather Derivatives INTRODUCTION Weather determines what shall we wear and eat, how shall we travel, where shall we spend our holiday, even what shall we do every single day. Furthermore, weather affects four basic purchasing decisions: what, where, when (Agnew and Thornes, 1995) and in what quantity to buy (Kirk, 2005). Retail sector is not traditionally perceived as weather sensitive sector, so there are only a handful of authors who studied weather sensitivity in retail. Weather sensitivity or weather exposure can be defined as sensitivity of sale, production or costs to meteorological elements such as temperature, sunshine, rainfall, snowfall, wind, etc. If volatility of output of certain sector is caused by changes in weather, sector is said to be weather sensitive. Uncertainty in future cash flows as a result of uncertainty of future weather is defined as weather risk. Lazo et al. (2011) conducted a national study on weather sensitivity of the whole U.S. economy and found that 2.3% of retail output and 2.2% of wholesale output are weather sensitive. The overall weather sensitivity of the U.S. economy amounts to 3.4%. Retail sector shows low relative weather sensitivity compared to mining, agriculture and energy sectors. However, assessed by absolute terms, retail sector shows greater sensitivity than traditionally perceived weather sensitive sectors which offers a sound argument for weather risk management in retail. Perceptions of weather effects on retail sales are somewhat divided. Many retail managers often blame weather for poor sales, but only some actively try to manage weather risk exposure given that many retailers offer diversified assortments thus mitigating weather effect on sales. That is why weather risk in retail needs to be further studied and discussed. The purpose of the paper is to give theoretical background as well as empirical findings on weather sensitivity in retail and to provide firm foundation for further studies on weather sensitivity in retail. The rest of the paper is organized as follows. Next section describes the theories on the nature and magnitude of weather effects on consumer spending and retail sales. Third section gives an overview of relevant empirical studies on weather effects in retail. Fourth section discusses the need for weather risk management in retail and proposes weather derivatives as potential risk mitigating tool. Fifth section gives concluding remarks.