All posts in FMCG

Zurich Insurance, Astral Foods, FirstGroup, and Bossini blame profit warnings on the weather

As shares plummet, how much longer will investors accept the finger pointing?

NYSE

Blaming the weather appears to be a long and noble tradition, supported by leaders in every industry, across the globe. Take 2016, for instance; this year, the weather has already been cited by an incredible array of business leaders for a range of spectacular losses.

Sports Direct, the United Kingdom’s largest sporting retailer, operating roughly 670 stores worldwide, was the first out of the gates. It issued a profit warning on January 8 announcing that it expected to miss its target for underlying profits due to unexpectedly warm weather over the Christmas period. That warning sent shares falling 14%. It was a real surprise after the company had just one month earlier confirmed it would hit its targets for this financial year during the reporting of its half-term results.

FirstGroup, the leading transport operator in the UK and North America, quickly followed suit, issuing its own profit warning that the floods that hit Britain over the winter had resulted in revenues falling by 9.5 percent in the third quarter and that operating profits for the year would be “slightly lowered”. Similarly, Zurich Insurance released a profit warning of an estimated 100 million further quarter business operating loss for its general insurance business as a result of the high number of claims following the British floods. Shares plummeted 9% following the release.

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How Businesses are Influencing the Relationship between the Weather and Consumer Demand

storm

When it comes to weather affecting consumer behaviour and purchase decisions, it has long been known that weather has an impact on consumer demand. The food we eat, clothes we wear, and how, where and how much we buy has all been scientifically proven to be influenced by the weather, it being second only to the economy in being the biggest single influencer on consumer behaviour.

Indeed, every day people make purchasing decisions based on the weather, from buying ice cream, sandals and swimsuits in the summer, hot soups and snow tyres in the winter, and less of beer and bottled water as autumn approaches. In turn, the seasonal cycle of weather purchases are accounted for by supply chain managers in stocking store rooms and giving discounts to clear out product before the seasonal event- or the season itself- leaves stockpiles of unsellable wares in their hands.

But what if everything we have known to be true about how the weather affects consumer behaviour and our ability to control this relationship was wrong? What if the seemingly uni-directional, unmanipulatable relationship between the weather and consumer behaviour was now being found to be being turned on its head? Specifically, what if a business could influence the relationship between the weather and consumers to its advantage?

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It’s not gambling if you never lose

gambling

When the business objective is entice retailers to pre-order a winter product despite promises of a warm winter, how do you overcome their reluctance due to risks associated with uncertain sales? As a result of climate change, this challenge is an increasingly common one, as retailers face going into seasons fearing “unseasonal weather”, whether that may be an unusually dry spring, cool summer, warm autumn, or any other weather condition or event considered adverse, unexpected, or unfavourable.

For the French sales team of Bridgestone, the reluctance of retailers to pre-order winter tyres in the July to September sales period because of the risk of Western Europe having a green winter this past year was causing just such a challenge. Retailers were understandably reluctant to stock up on a product that was for a weather condition that might not transpire, instead preferring to wait to order in the event of snow, which would result in Bridgestone losing sales and being vulnerable to logistical bottlenecks in case of sudden demand.

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Paradigm Change: The Weather is Manageable

management

Historically, companies lost money as a result of the weather, sometimes a significant percentage of their profit margins, and it was generally accepted that there was little to nothing they could do about it. But recently, the outlook has changed, and there is an unprecedented increase in the number of companies who insure, or are about to insure, against the consequences of unfavourable weather. Long confined to the ranks of fate, the consequences of weather on a business’s profits are now manageable like all other risks. Many understand and welcome this development, while others struggle.

Over the last ten years, we have met many business leaders, treasurers, CFOs and marketing analysts seeking to better understand the vulnerability of their business to the daily vagaries of weather. In most cases, the a priori assumption was that whilst weather was affecting sales, production costs, yields, prices or results, it was an external factor not worth attention, investigation or the allocation of resources. Whether the agricultural sector, manufacturing, transport, tourism, retail, mining, or beverages, the conclusion was always the same: these companies had always lived with the weather, and accepted its effects, and there was no reason to change that.

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