March 17, 2003 -- With many shoppers around the country snowed in or hit by otherwise erratic weather this winter, retailers ranging from Target to Tupperware have been registering disappointing sales.
But short of being clairvoyant, there has traditionally been little companies could do to plan for weather's vagaries. And that's bad news for the bottom line. Weather affects around $3 trillion in private industry alone, estimates John Dutton, professor emeritus of meteorology at Pennsylvania State University.
Now, however, enterprises have sprung up to help companies dip into weather data for predicting consumer behavior and managing weather risk. Among the newer ventures working the weather are Weather Ventures, formed by Dutton, the Wayne, Pa.-based Planalytics and Billerica, Mass.-based WSI Corporation.
"If you could forecast today that next winter is going to be colder than normal in Chicago, the economic impact of even that kind of forecast is staggering," says Keith Seitter, deputy executive director of the Boston-based American Meteorological Society, or AMS.
Stormy Weather or Sunny Sales?
While the weather firms' methods and philosophies of forecasting differ, experts agree that with improved forecasting methods, more business will use weather more often as a tool to help improve their planning.
"This is an area we think is going to be growing dramatically," says AMS' Seitter.
For example, knowing when and where inclement weather is going to strike can help companies move inventory to where more consumers will be more willing to buy them.
One firm, Planalytics, founded in 1995, helps businesses do exactly that. In recent years, the firm's clientele has grown to include consumer products and retail companies like Gillette's Duracell batteries, Home Depot and Wal-Mart.
"Our forecasts go out about 12 to 15 months. But none of our clients ever see a weather forecast," says company president and chief executive Frederic Fox. "What they see is the impact that weather has on specific business."
In one case this fall, the company helped Duracell allocate more batteries to parts of the country expected to be most hard-hit by hurricanes. Fox estimates Planalytics' forecasts were correct anywhere from 65 to 75 percent of the time, "Which is maybe twice the accuracy a company will have in coming up with a plan for next year."
Adds Fox: "It's certainly not perfect, but we get it right often enough for them to make a lot of money off of it. And that's really the key."
In another instance, Planalytics was able to provide golf products maker TaylorMade-adidas Golf with accurate forecasts for number of rounds played, a closely watched measure of sales in the golf industry, says Nate Heckman, TaylorMade-adidas Golf's manager of marketing intelligence.
"We've got to be looking at other competitive advantages," says Heckman. "If it's something as simple as the season in Wisconsin is going to start 45 days earlier this year, that's huge."
Dabbling in Derivatives
Another tool commonly used to help companies offset weather risk is weather derivatives, which are basically insurance policies used to hedge a firm's exposure to weather.
For example, a ski resort could purchase a weather contract that would pay it a set amount if the area didn't receive a certain level of snow that winter. That way, the resort can try to recoup some of the money lost by low attendance.
Interest in weather-based derivatives has skyrocketed this year. Trading of weather-related futures and options contracts on Chicago Mercantile Exchange reached a record 1,247 contracts in January, compared to just 11 contracts traded in January of 2002, according to the Chicago Exchange and Weather Risk Management Association, the Washington, D.C.-based trade association of the weather risk industry.
"Because weather has an impact in so many of these different areas, you see a lot more companies going to weather derivatives," says Kevin Kloesel, director of Outreach Progams at the Oklahoma Climatological Survey in Norman, Okla.
Heated Debate: How Accurate Are Forecasts?
With the growth in weather-based business planning, however, debates have arisen about the accuracy of long-term forecasts.
Some companies, such as WSI, issue three-month seasonal forecasts twice monthly. The firm says it predicted a hot 2002 summer season, a cold 2002-2003 winter in the Southeast and a warm 2002-2003 winter in the Pacific Northwest.
Planalytics, which does not release its forecasts to the public, says its data goes out over a year at intervals of a few days. The company uses a proprietary system that is not available to the general public.
But the AMS says while it may be possible to predict certain statistical properties of the climate for the next season or the season after that, predictions of day-to-day weather changes beyond a week or two have no scientific basis.
Still, Planalytics remains undaunted, saying if their system didn't work, their clientele wouldn't have grown so strongly in the past few years. Says Fox: "Our accuracy with our clients is judged on whether the decisions we help them make work out."