Weather Permitting

By Bartram, Peter | Financial Management (UK), September 2011 | Go to article overview
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Weather Permitting

Bartram, Peter, Financial Management (UK)

What's the best weather for selling chocolate? Earlier this year Thorntons, which had 369 UK shops before an announced programme of closures, said the unseasonably warm weather in the run-up to Easter had hit sales and would cut the company's full-year profits. So not hot, then.

But back in February the company complained that the freezing temperatures and heavy snow last December meant delivery lorries couldn't get through to the shops. Yuletide sales were down by [pounds sterling]3.5m. So not cold either.

Thorntons is not the only company that has had to issue weather-related profits warnings this year. Model train maker Hornby blamed the pre-Christmas blizzards for profits falling short of expectations. Logistics operator UK Mail said the extra costs of delivering along frozen roads would reduce earnings. Specialist building services company Northern Bear, which is listed on the AIM market, said its profits would be down as a result of terrible weather last November and December. And retailer Alexon Group blamed a weather-induced 20 per cent drop in like-for-like sales in its vital pre-Christmas trading period on its profit warning.

CFOs who believe these are relatively isolated incidents based on rarely repeated weather conditions should think again. Financial weather specialists say that extreme weather events are likely to become more frequent as a result of global warming. Moreover, companies that thought they were immune from weather-related damage to their business should take a closer look at the huge costs that unexpected weather can cause.

Matt Huddleston, principal climate change consultant at the Met Office, says that extreme weather events cost businesses around the world $218bn last year. Only $43bn of those losses were insured. "Businesses often write off weather impacts as acts of God - force majeure - and let it hit the bottom line, share price and reserves of capital," he says.

Extreme weather affects almost all firms in some ways. The Federation of Small Businesses says that each day of snowy disruption last year cost the country's companies between [pounds sterling]600m and [pounds sterling]lbn in lost output - often because staff couldn't get to work.

"It's quite common that businesses don't manage weather risk," adds Huddleston. But it doesn't have to be like that.

So what's a CFO to do? Well, the first thing is to decide if the weather is a factor that could hit the company's bottom line. Jim N R Dale, who founded British Weather Services in 1987, says: "For every drop of rain, flake of snow, breath of wind and degree rise or fall in temperature, there is a commensurate rise and fall in the supply and demand of 90 per cent of goods and services in the UK and Ireland today."

Hyperbole, perhaps, but this year's crop of profits warnings shows that more firms are vulnerable to unexpected weather events. Dale says: "There are weather winners and weather losers. If you don't keep an eye on the weather, more often than not you end up as a loser because you're not making use of the meteorological information that's out there."

His clients include companies that want forecasts for the next few hours, days, weeks or even months. Firms running sporting or outdoor events may want to know what will happen with Britain's notoriously changeable weather in the next hour or two.

Logistics firms and companies who rely on key staff who must get to work want forecasts ranging from one to ten days so they can plan for likely problems on the road, rail and in the air. Firms making products affected by weather changes-everything from sun cream to woolly socks - want monthly forecasts so they can plan timely advertising and marketing campaigns to coincide with hot, cold, wet or dry snaps. And fashion firms want seasonal forecasts running up to three months ahead so they can ensure the kind of clothes people may want to buy are on the shelves.

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