To Shop, or Not to Shop: Depends on the Weather

The impact of volatile weather patterns on Macy’s struggle to correctly forecast demand and manage inventory and promotions during the 2015 – 2016 holiday season.

The winter of 2015 – 2016 was one of the warmest on record in the U.S. Driven by El Niño, the average temperature was a record 4.6⁰F above the 20th century average [1]. The precipitation total for the U.S. was 1.26 inches above the 20th century average, and ranked as the 12th wettest winter on record [1]. During one of the warmest and wettest winters in history, many fashion retailers, including Macy’s, faced a dilemma: no one wanted to shop.

Figure 1: [1]

temperature-average

It’s estimated that fashion retailers in the U.S. lost about $572 million in sales because of the mild weather in November and December 2015 versus the same period in 2014 [2]. In Macy’s January 2016 press release, the Company announced that comparable sales declined 4.7% in the months of November and December 2015, compared with the same period in 2014, and of that, approximately 80% of the declines were because of misses in expectations in cold-weather goods [3].

For fashion retailers such as Macy’s, the holiday season can account for almost 30% of sales. Given the long lead times needed to source products from manufacturers to vendors to distributors to retailers, fashion retailers like Macy’s typically plan their inventories and promotions for the holiday season during the first half of the year. Coming off one of the coldest winters in 2014 – 2015 in the Northeast, Macy’s over –indexed on cold weather goods for 2015. When the cold weather never came, Macy’s blamed the 60⁰F temperatures for interfering with its holiday inventories and promotions, and was forced to offer heavy discounts in an effort to move inventory [4]. Even this wasn’t enough to counteract the negative sales impact, though, and in January 2016, the retailer announced that it was cutting 4,000 jobs due to the huge miss in sales expectations [5].

While it can be argued that there are many other factors that contributed to Macy’s poor financial performance during the 2015 – 2016 holiday season, I do believe that as a general trend, dramatic variability in weather patterns caused by climate change has a negative impact on fashion retailers such as Macy’s because of their inability to correctly forecast demand, and therefore to manage inventory and plan promotions. Experts argue that between 2% – 8% of retail revenues per year are affected by the weather [6]. As climate change causes weather patterns to become even more unpredictable, the impact of weather on retailer financial performance can only become more pronounced. To mitigate against the risks, I think that Macy’s will need to change its business model to either place less emphasis on holiday and promotions, or significantly shorten supply chains to be able to adapt to weather-driven consumer demand on a timely basis.

Macy’s has not been sitting idle though. The company recognizes that it has a social responsibility to combat climate change. Macy’s has committed to reducing its impact on the environment by eliminating wasteful behavior, pursuing programs to consume less electricity and water, use more environmentally friendly solutions, and advocate sustainability and renewability with vendors and customers [7]. Macy’s has also committed to short-term, quantifiable goals, including:

  • Reducing energy use by another 2% in 2016, 2017 and 2018;
  • Committing to having a total of 113 solar power systems at Macy’s facilities by the end of 2016;
  • Increasing the amount of waste diverted from landfills to 70% by 2018;
  • Maintaining the use of recycled paper for 99% of its marketing materials;
  • Decreasing the waste diversion from construction by 15% over 2016 levels by 2018 [7].

While Macy’s has been making great strides to promote sustainability and build short-term goals, I would challenge the company to think about what their longer-term solution is in terms of both sustainability and operations. For one thing, I think that Macy’s can work to influence its vendors to reduce greenhouse gas emissions throughout the entire supply chain, as other retailers such as Walmart have done. I also think that from an operational standpoint, Macy’s will need to rethink its supply chain model. To be able to more accurately forecast demand, some companies like Target and Kohl’s have started to work with meteorologists to use weather-related data to plan collections and schedule promotions [8]. Another option for Macy’s is to explore fast fashion, and to figure out if the Company can shorten the production cycle from the typical nine months for U.S. retailers to four months to be able to better adjust to weather-driven consumer demand.

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[1] “Winter was record warm for the contiguous U.S.,” March 8, 2016, National Oceanic and Atmospheric Administration, http://www.noaa.gov/news/winter-was-record-warm-for-contiguous-us, accessed November 2, 2016.

[2] “How the Weather Cost Specialty Retailers $572 million in Sales,” Weather Analytics (blog) Planalytics, January 26, 2016, http://www.planalytics.com/retailers_weather/, accessed November 2, 2016.

[3] “Macy’s, Inc. Reports November/December Sales and Updates 2015 Guidance.” Macy’s, Inc. press release (Cincinnati, OH, January 6, 2016).

[4] Adrianne Pasquarelli. “Weather Woes Spell Red for Retailers,” AdvertisingAge, November 23, 2015. http://adage.com/article/cmo-strategy/weather-woes-spell-red-retailers/301461/, accessed November 2, 2016.

[5] Phil Wahba. “Macy’s Cutting 4,000 Jobs After a Huge Drop in Holiday Season Sales,” Fortune, January 6, 2016. http://fortune.com/2016/01/06/macys-cutting-4000-jobs-after-a-huge-drop-in-holiday-season-sales/, accessed November 2, 2016.

[6] Ivana Kottasova. “Fashion retailers pay heavy price for warm winter,” CNN Money, January 6, 2016. http://money.cnn.com/2016/01/06/news/companies/warm-weather-business/, accessed November 3, 2016.

[7] Macy’s Inc., “Our Road to Sustainability: Doing Better Every Day,” http://macysinc.com/social-responsibility/sustainability-five-point-plan/, accessed November 3, 2016.

[8] Teri Agins. “Warming Trend: White Jeans Year Round,” The Wall Street Journal, August 30, 2007. http://www.wsj.com/articles/SB118843034338212804, accessed November 3, 2016.

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7 thoughts on “To Shop, or Not to Shop: Depends on the Weather

  1. Interesting article – thank you! In addition to the suggestions above, I believe Macy’s could further diversify the risk of weather-related variations in sales by promoting their online operations as an alternative to shopping in-store on a rainy day. Through effective marketing and advertising to build awareness of Macy’s online platform, customers who had an intent to shop in a ‘brick and mortar’ Macy’s store could achieve their shopping desire online. In addition, promotional offers such as free-delivery or ‘click and collect’ could be employed to allow customers to make their purchases online with no additional expense. In the U.K., John Lewis department stores [1] effectively deployed an omnichannel strategy, significantly investing in an online platform with ‘click and collect’ functionality [3], with huge success [2].

    References:
    [1] http://www.i-cio.com/innovation/it-infrastructure/item/john-lewis-s-journey-to-omnichannel-retail
    [2] https://www.ft.com/content/0ef369f0-b44e-11e5-8358-9a82b43f6b2f
    [3] http://www.independent.co.uk/news/business/news/john-lewis-click-and-collect-service-overtakes-home-delivery-as-online-sales-grow-19-9957229.html

  2. This post is an interest take on the impact that climate change can have on consumer behavior, and how it creates ripple effects across the supply chain. I like your suggestions of operational changes that Macy can implement, especially hiring a meteorologist. It does seem that weather and climate planning is more and more relevant for design and purchasing teams for clothing retailers. One thing I would caution against is pursing fast fashion. Although it may alleviate the pain that Macy feels when it has stale products that are not weather appropriate, fast fashion wreaks havoc on the environment because of the sheer amount of additional textiles, cotton, and other inputs it requires. It will be interesting to see how Macy’s handles this tradeoff between current sustainability efforts and mitigating initiatives to improve profits that will damage the environment even more.

    While doing diligence at my prior job, I analyzed a company that had an efficient way to deal with seasonal variability. It is a clothing brand that owns its stores all across the United States. It has two factories, one located in Asia and another located near its headquarters in Northeastern United States. While most of the items they offer are produced in Asia, the US factory has the capability to manufacturer all the items offered as well (in smaller batches). Whenever new lines are launched, they are “tested” across geographies. For example, the summer lines are first tested in southern states where the weather is warmer in the winter before offered in the northern stores the next summer season. The brand then uses the sales data to adjust the production numbers for the summer line launch. If there are any surpluses, the company has a robust distribution network that can move the styles that are no longer weather appropriate from one area to another, thereby reducing idle inventory sitting in the back of stores. If there are any shortages, all the stores can submit orders to the US factory who will then rush produce additional items for the stores to sell.

    Given that Macy has a similar extensive network of stores and suppliers, I think that this business model could be a viable option for Macy’s in the future.

  3. Yujie,

    Thanks for a thought-provoking read on how climate change has impacted the retail industry!

    In addition to the sustainability initiatives that Macy’s has taken on in the short-run, the company can also emulate the business model of its stores on the West Coast in anticipation of milder winters. Having lived in Los Angeles for the past two years, I have witnessed Macy’s pushing holiday inventory despite being located in a warm and dry climate. The product mix is less winter apparel heavy and leans more towards holiday decor, nostalgia, etc. As winters become warmer in many locations, Macy’s can perhaps alter its inventory to better reflect the product mix of its stores in warmer climates.

    However, as Yujie thoughtfully mentioned, longer term solutions are necessary to combat the consequences of climate change. In addition to hiring a meteorologist and influencing suppliers to be more sustainable, Macy’s can also partner with brands that promote sustainable products and increase consumer awareness of the issue. Macy’s has the power to influence the shopping experience of a consumer through the brands that it buys – by purchasing brands that use eco-friendly inputs, Macy’s can not only promote sustainability in the minds of consumers, but also influence them to shop for environmentally-conscious products.

  4. This is a super interesting article – thanks for sharing! I agree with CC’s comment above. Focusing on driving online sales rather than brick-and-mortar can help mitigate the high inventory holding costs in the physical stores and reduce the impact of any lead time and/or supply chain bottlenecks.

    I have become quite interested in the intersection of the apparel industry and climate change. I was surprised to learn that second only to oil, the $3 trillion apparel industry is the second largest polluter in the world, contributing a whopping 10% of global C02 emissions [1]. Unfortunately, in addition to variables such as the use of cheap synthetic fibers and massive deforestation, the consumption of fast fashion garments is a key source of many apparel-related carbon emissions, averaging 400% per garment per year [2]. As more and more fast fashion consumers turn fashion into a “throw away commodity”, the environment suffers. To combat this, I would challenge Macy’s to incorporate some sort of recycling program that would encourage their fast fashion buyers to recycle their unwanted clothes. Separately, I would challenge Macy’s to build on its existing efforts to combat climate change by partnering with environment-focused apparel brands (brands that primarily use environmentally-conscious fabrics such as linen) and featuring these brands in flagship stores. Through these partnerships, Macy’s could establish a “green” marketing campaign to help rally consumer enthusiasm away from more traditional, yet harmful, materials such as cotton to more environmentally-friendly materials.

    [1] http://www.forbes.com/sites/jamesconca/2015/12/03/making-climate-change-fashionable-the-garment-industry-takes-on-global-warming/#44690a3b778a

    [2] Ibid.

  5. Insightful article.

    I also saw similar trends working in the retail industry as we saw a high correlation with our store comp sales with any degree higher (or colder, in winter) than average. What was even more fascinating that this was a recent trend, meaning the swings were something relatively new and had not been incorporated into consumers’ regular purchasing behavior.

    Another point to ponder regarding mass retail is what happens to the product after it leaves the shelves (or when it doesn’t)? Old merchandise is often clearanced or sold to 2nd tier retailers (i.e., TJ Maxx) at deep discount. If the product cannot be sold there, it is often purchased by an intermediary, packaged in bulk, and then shipped for resell in emerging markets. Eventually, it ends up in a landfill. With the supply of ‘widgets’ being produced and sold in the world outpacing the demand, companies should think start thinking more about quality rather than quantity.

  6. Yujie,

    This was a very interesting read. A lot of very good points were made in the above comments. I would add that clothing manufacturers are the world’s second biggest polluter of fresh water and so doubling down on internal controls for chemical disposal should be of the utmost importance for Macy’s suppliers, and Macy’s can play a huge role in ensuring that.

    Additionally, Macy’s can definitely influence the conversation around fashion. Using natural fibers in lieu of synthetic fibers (70M barrels of oil are used every year just to make polyester!) for clothing could be one way of reducing the apparel industry’s carbon footprint. Additionally investing in partnerships to develop materials that are more eco-friendly but do not require large amounts off pesticides or fossil fuels to be produced could do wonders for the world AND for their brand!

  7. Yujie, this reminds me of an article I read a while ago that suggested there was a quantifiable correlation between weather variation and sales in retail stores. I know you’re mostly talking about the effects of weather variability on consumer behavior / willingness to go out and shop (which makes complete sense and I think you conveyed highly effectively), but I think the connection between retail sales and weather could be expanded even further to include buying patterns and inventory management. Specifically, what if Macy’s orders a full season’s supply of Canada Goose coats and then it turns out to be an unusually mild winter? That would certainly have a negative impact on sales, but to what extent?

    There was a study that found that each degree below “normal” temperatures in spring costs 3% in sales revenue and each degree above normal in autumn decreases sales revenue by 2%. In fact, abnormal weather correlates with 52% of revenue in spring and 43% of revenue autumn. All of this eventually translates into the fact that weather generally accounts for half of the revenue decline in the textile and clothing sectors. [1]

    The study also suggested different correlations between weather variability and types products offered by retailers (women’s vs. men’s clothing, chain vs. boutique, etc.) I would be very interested to see whether Macy’s takes into account this type of data when making buying decisions. In fact, I would be interested to see how Macy’s thinks about climate patterns and variability with regards to inventory management.

    [1] http://www.weatherandeconomics.com/2015/02/20/fashion-industry/

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