Magazine article Marketing

Climate: Big Freeze, Big Profits

Magazine article Marketing

Climate: Big Freeze, Big Profits

Article excerpt

The national obsession with weather has been particularly well-fuelled this year. A series of statements by the Met Office last autumn spelt out the kind of news that hospital staff dread and tabloid newspaper journalists love - it's likely to be the coldest winter for a decade.

It marks the first time that the service has decided to make this kind of blanket prediction for an upcoming season and reflects its confidence (albeit expressed as a two-thirds probability) in the weather signals it has detected.

The fact that we are halfway through the winter period, yet the Siberia-style 'big freeze' has largely failed to materialise, has not stopped the media weighing in with regular doom-laden updates. Even the fact that December was slightly warmer than average has not dampened the predictions.

Met Office commercial manager Jonathan Hearth points out that even in especially cold winters, one month out of the three will see temperatures climb above the average.

But chilly weather conditions - and the public perception of their imminent arrival - has proved good news for a variety of business sectors. Although some lose out (see box, page 26), the warning to batten down the hatches has prompted one of the ever-rarer instances of consumers parting with their cash en masse.

The challenge for these companies is to be able to predict the weather sufficiently well to arrange the right supplies of appropriate goods to enable them to meet consumer demand - and to be able to hold down their own energy costs in order to maintain commercially viable margins.

Energy suppliers

The energy sector is one of the most weather-volatile business categories.

Gas is likely to be in particularly high demand if the mercury plummets because most homes in the UK use the fuel for heating. Demand for gas also rises because one-third of the country's electricity-generating stations are run on gas and more electricity is used in homes to heat ovens and light rooms when people stay inside for longer. During the final two weeks of November 2005, when temperatures barely managed to rise above the freezing mark, demand for gas and electricity was between 3% and 5 % higher than the same period the year before, according to the National Grid.

In the opposite way to most markets, wholesale gas prices rise as soon as demand increases. The consumer gas firms have passed these hikes on to their customers over the past year; a bad winter would only increase this price pressure. The gas firms face the dilemma of how much of their margins to protect by raising prices - too much and they lose customers, as British Gas discovered last year.

The situation is complicated by the fact the energy prices can also be influenced by the prediction of bad weather, as well as its reality. Oil traders, for example, will increase their holdings in the oil futures market if a cold spell is predicted, which leads to higher prices. Many observers suspect that the prospect of a bad winter also provides a handy excuse for gas and electricity firms to raise prices to consumers.

'There are often suggestions that suppliers have taken advantage of the forecasts,' says Steve Dorling, sales director at weather forecasting company WeatherQuest. 'They are always quick to raise prices because of the higher demand caused by severe weather, but are slow to drop them if the weather changes for the better.'

Automotive services

Breakdown services do well as a freeze sets in. A spokeswoman for the RAC says that a significant proportion of its members sign up at the side of the road after they have broken down. She adds that many weather-related breakdowns are caused because consumers are getting progressively worse at regular maintenance checks. 'People tend to rely on the lights coming on on the dashboard.'

Car-care retailer Halfords benefits as drivers stock up on products such as de-icers and antifreeze - the chain has already boosted its order of winter packs that contain such products, and has created point-of-sale material to remind consumers of the need to prepare for a bad winter. …

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