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Assessing and hedging the cost of unseasonal weather: Case of the apparel sector

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  • Bertrand, Jean-Louis
  • Brusset, Xavier
  • Fortin, Maxime

Abstract

Retail activities are increasingly exposed to unseasonal weather causing lost sales and profits, as climate change is aggravating climate variability. Although research has provided insights into the role of weather on consumption, little is known about the precise relationship between weather and sales for strategic and financial decision-making. Using apparel as an illustration, for all seasons, we estimate the impact on sales caused by unexpected deviations of daily temperature from seasonal patterns. We apply Seasonal Trend decomposition using Loess to isolate changes in sales volumes. We use a linear regression to find the relationship between temperature and sales anomalies and construct the historical distribution to determine sales-at-risk due to unseasonal weather. We show how to use weather derivatives to offset the potential loss. Our contribution is twofold. We provide a new general method for managers to understand how their performance is weather-related. We lay out a blueprint for tailor-made weather derivatives to mitigate this risk.

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  • Bertrand, Jean-Louis & Brusset, Xavier & Fortin, Maxime, 2015. "Assessing and hedging the cost of unseasonal weather: Case of the apparel sector," European Journal of Operational Research, Elsevier, vol. 244(1), pages 261-276.
    • Handle: RePEc:eee:ejores:v:244:y:2015:i:1:p:261-276
    DOI: 10.1016/j.ejor.2015.01.012
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    8. Linnenluecke, Martina K. & Smith, Tom & McKnight, Brent, 2016. "Environmental finance: A research agenda for interdisciplinary finance research," Economic Modelling, Elsevier, vol. 59(C), pages 124-130.
    9. Brigitte Roth Tran, 2019. "Sellin’ in the Rain: Adaptation to Weather and Climate in the Retail Sector," Finance and Economics Discussion Series 2019-067, Board of Governors of the Federal Reserve System (U.S.).
    10. Tian, Xin & Cao, Shasha & Song, Yan, 2021. "The impact of weather on consumer behavior and retail performance: Evidence from a convenience store chain in China," Journal of Retailing and Consumer Services, Elsevier, vol. 62(C).
    11. Ivana Štulec, 2017. "Effectiveness of Weather Derivatives as a Risk Management Tool in Food Retail: The Case of Croatia," IJFS, MDPI, vol. 5(1), pages 1-15, January.
    12. Tine Van Calster & Filip Van den Bossche & Bart Baesens & Wilfried Lemahieu, 2020. "Profit-oriented sales forecasting: a comparison of forecasting techniques from a business perspective," Papers 2002.00949, arXiv.org.
    13. Hyunju Kang & Hyunduk Suh & Jongmin Yu, 2019. "Does Air Pollution Affect Consumption Behavior? Evidence from Korean Retail Sales," Asian Economic Journal, East Asian Economic Association, vol. 33(3), pages 235-251, September.
    14. Régis Chenavaz & Octavio Escobar & Xavier Rousset, 2019. "An analytical framework for retailer price and advertising decisions for products with temperature-sensitive demand," Applied Economics, Taylor & Francis Journals, vol. 51(52), pages 5683-5693, November.
    15. Hu, Jianhao & Zhang, Xuan & Chen, Hanyu(Yuki) & Li, Wanyue, 2024. "When it rains, it pours? The impact of weather on customer returns in the brick-and-mortar retail store," Journal of Retailing and Consumer Services, Elsevier, vol. 77(C).
    16. Martínez-de-Albéniz, Victor & Belkaid, Abdel, 2021. "Here comes the sun: Fashion goods retailing under weather fluctuations," European Journal of Operational Research, Elsevier, vol. 294(3), pages 820-830.
    17. Å tulec, Ivana & Petljak, Kristina & Naletina, Dora, 2019. "Weather impact on retail sales: How can weather derivatives help with adverse weather deviations?," Journal of Retailing and Consumer Services, Elsevier, vol. 49(C), pages 1-10.
    18. Khadija Ashraf & Kangjae Lee & Geunhan Kim & Jeon-Young Kang, 2024. "Sales in Commercial Alleys and Their Association with Air Pollution: Case Study in South Korea," Sustainability, MDPI, vol. 16(2), pages 1-19, January.
    19. Sagaert, Yves R. & Aghezzaf, El-Houssaine & Kourentzes, Nikolaos & Desmet, Bram, 2018. "Tactical sales forecasting using a very large set of macroeconomic indicators," European Journal of Operational Research, Elsevier, vol. 264(2), pages 558-569.
    20. Badorf, Florian & Hoberg, Kai, 2020. "The impact of daily weather on retail sales: An empirical study in brick-and-mortar stores," Journal of Retailing and Consumer Services, Elsevier, vol. 52(C).
    21. Gülpınar, Nalân & Çanakoḡlu, Ethem, 2017. "Robust portfolio selection problem under temperature uncertainty," European Journal of Operational Research, Elsevier, vol. 256(2), pages 500-523.
    22. Hongyong Fu & Jiawen Li & Yujie Li & Shengzhong Huang & Xiangkai Sun, 2018. "Risk Transfer Mechanism for Agricultural Products Supply Chain Based on Weather Index Insurance," Complexity, Hindawi, vol. 2018, pages 1-17, August.
    23. Swaminathan, Kritika & Venkitasubramony, Rakesh, 2024. "Demand forecasting for fashion products: A systematic review," International Journal of Forecasting, Elsevier, vol. 40(1), pages 247-267.
    24. Chabot, Miia & Bertrand, Jean-Louis, 2023. "Climate risks and financial stability: Evidence from the European financial system," Journal of Financial Stability, Elsevier, vol. 69(C).

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