As difficult as it is to forecast a hurricane’s intensity and where it will make landfall—it may be equally challenging for companies to forecast and understand the full impact of such an event on their sales.
Hurricane Harvey will certainly ripple through many organizations’ supply chains for months to come and what they may discover is that this could be costlier than any hurricane of the past. To understand this, we not only need to look at the cost, but also what this may mean for sales.
Historically, hurricanes that hit the United States have led to an obvious slowdown in economic activity right after they occur. We generally see a downturn in other regions that are not even directly impacted by the storm or its flooding. There is also an economic slump with regards to consumer sentiment across the United States correlating to major events; for instance, it is likely that more people stay at home and wait for the catastrophe to unfold. Following this initial negative trend, there is a less obvious rebuilding phase, which leads to an equal, if not greater, economic rebound. Over time, we have consumers and retailers replacing what they have lost and Federal aid flowing into the area, giving rise to an increase in economic activity. Just like the downturn, other unaffected regions feel this recovery as well. These stimulus dollars—compounded by some pent-up demand of consumers—seem to trickle through the economy to other regions that are not directly impacted by the storm and boost sales everywhere.
This is all well and good, but just like in a storm where no two neighborhoods are affected the same—the impact on your business may not follow this perfect trend. You need to look a little deeper at how your business sector reacts during these times and what your consumers’ behaviors will be going forward.
The need for this and to understand sales during and after the impact of such a storm is critical to planning and succeeding. If you overreact to the initial downturn in sales, you may not be properly prepared for the retail storm surge coming when things settle down. If you ignore your consumer behavior, you may be overstocked and all your money may be tied up in inventory.
What exactly will occur in your specific market and how will Hurricane Harvey impact your forecast? It all depends. Here are just a few key factors that a demand planner may want to consider because they could impact your forecast and business.
While we may have big winners of this tragedy (if we can call them that), like construction companies and related industries, other sectors are going to feel the storm surge of lost sales and then the aftershock of those sales not returning. Many companies have a distinct summer selling season that a good portion of their sales comes between Memorial Day and Labor Day. This can be anything from drink cups, to outdoor sports, to mattresses. For these sectors, the storm that formed on August 24, 2017, then slammed into the Texas and Louisiana coasts, and stalled there for four days while dumping as much as 52 inches of rain in some parts with consequential flooding that will last well beyond Labor Day. This is losing the entire last week of summer and time and sales they will not be able to get back.
Next, do not forget: it is not just homes but also retailers and manufacturers that need to replenish what they lost as well. As an example, there are an estimated 500,000 automobiles that may have been damaged with many of them sitting in car lots needing to be replaced. Warehouses and retail stores full of products have been flooded and before these companies open back up for business, they will need new replacement products. This will be new channel inventory and a spike in demand for many sectors and products that needs to be forecasted appropriately.
There are still many retailers with primarily brick and mortar stores that rely heavily on foot traffic created over Labor Day weekend sales. These are stores focusing on back-to-school, fashion, or many other consumer products just to name a few. These sectors missed a critical weekend of in-store traffic and as more consumers stayed home, online traffic reaped the rewards. While in-store sales have been trending down for some time, thanks to mega online giants such as Amazon, we will most likely see traditional stores take another hit from Hurricane Harvey. Understanding your company’s omnichannel presence and market share may be equally important as understanding consumer habits during major storms.
Finally, we cannot kid ourselves. This hurricane is going to cost supply chains and consumers a lot of money. In the impacted area, there are hundreds of factories, warehouses, distribution centers, and major ports. Sixty-eighty key chemicals and intermediates originate from the Texas region and much of the country’s polymers and resins come from this area. Around 10% of manned oil platforms in the Gulf were evacuated, according to the Bureau of Safety and Environmental Enforcement. While the fallout is still being determined, gas prices have risen an average of 23 cents already and it is estimated that they will to continue to go higher. All of this adds up to higher costs for fuel, higher costs for logistics, higher costs for goods, and lower sales for non-essential items for some people. As prices continue to climb and people spend $3.00 or more a gallon at the pump—sectors that rely on discretionary income will continue to see a decline and be hardest hit.
For the sectors that have lost the final week of their summer selling season, lost foot traffic for back to school and Labor Day weekend, or have been impacted by higher costs and less discretionary spending—it means estimates as much as $15 billion in economic activity will be missing. That constitutes a 1% drop in total U.S. GDP measured on a month-over-month basis. That said, the government will most likely spend that much in its first round of spending alone. Overall, at the aggregate level, the storm is likely to have a relatively minimal effect on overall economic growth, once we factor in the stimulus effect of the reconstruction phase (estimated depressing real spending growth by estimated 0.3% in quarter three). For your company, the impact may be much greater. The real question should be this: what does it mean to your business and how can you forecast the effect on your sales?
Forecasting this is not only tricky, but it is much like the hurricane: you can end up with a large cone of uncertainty in trying to predict your demand after this type of storm. While we cannot predict the weather, we can better anticipate consumer behavior during and after a hurricane with good tools, data, and skilled business forecasting professionals. If you would like more information, please contact email@example.com
We wish for all who are affected by this tragedy, a speedy recovery.