Accepted Manuscript

The impact of systematic changes in weather on the supply and demand of

beverages

Bra Kele, Patricia Gmez-Acevedo, Nazrul I. Shaikh

PII: S0925-5273(17)30244-X
DOI: 10.1016/j.ijpe.2017.08.002
Reference: PROECO 6783

To appear in: International Journal of Production Economics

Received Date: 30 November 2016

Revised Date: 29 July 2017
Accepted Date: 2 August 2017

Please cite this article as: Kele, B., Gmez-Acevedo, P., Shaikh, N.I., The impact of systematic
changes in weather on the supply and demand of beverages, International Journal of Production
Economics (2017), doi: 10.1016/j.ijpe.2017.08.002.

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 ACCEPTED MANUSCRIPT

The Impact of Systematic Changes in Weather on the Supply and Demand of Beverages

Bra Kele, Patricia Gmez-Acevedo, Nazrul I. Shaikh

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July 2017

Bra Kele

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Ph.D. candidate
Department of Industrial Engineering
University of Miami

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1251 Memorial Drive
Coral Gables, FL 33146
USA
email: bkeles@miami.edu

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Patricia Gmez-Acevedo
Ph.D. candidate
Department of Industrial Engineering
University of Miami
1251 Memorial Drive
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Coral Gables, FL 33146

USA
email: p.gomezacevedo@umiami.edu
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Nazrul I. Shaikh*
Assistant Professor
Department of Industrial Engineering
University of Miami
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283 McArthur Engineering Building

1251 Memorial Drive
Coral Gables, FL 33146
USA
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voice: +1 305-284-2831
fax: +1 305-284-4040
email: n.shaikh@miami.edu
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* Corresponding Author

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The Impact of Systematic Changes in Weather on the Supply and Demand of Beverages

Abstract

Weather, especially temperature, plays an important role in determining the supply and demand for a

vast variety of goods and services. Though the economic impact of extreme weather is often measured and

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reported, the impact of systematic changes in weather, such as long-term temperature trends or short-term

heat and cold waves are seldom quantified. In this research, we posit that such systematic changes in

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temperature impact the profitability of firms, and we develop a two-step econometric model to quantify the

impact. The proposed two-step model estimates the impact that temperature has on the profitability of firms

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and partitions this impact into a long-term and a short-term component. We take up the case of six liquid

refreshment beverages (LRBs) for illustrating the impact that systematic change in temperature has on

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demand. The results indicate that (a) the demand for LRBs is increasing by about 0.21% (63 million gallons)
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from year to year on account of the rising temperature trend, and (b) there is an asymmetry in the effect of a

heat wave versus a cold wave on beverage demand (i.e., the weekly demand for beverages increases by about
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2.1% per degree on account of a heat wave while the weekly demand decreases by only 0.4% per degree on

account of a cold wave). We also illustrate how these estimates of the impact of the long-term temperature
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trends could be linked to strategic decisions, such as facility location, and the estimates of the impact of the
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short-term temperature aberrations could be linked to operational decisions such as the inventory order

quantity in a week when there is a temperature aberration.

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Keywords: Temperature trends; heat and cold waves; beverage demand; two-step estimation; reference-point

effect.
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Highlights

The impact of changes in temperature on the demand of six beverage categories has been quantified.

This impact is partitioned into a long-term trend and a short-term heat and cold wave effect.

The long-term temperature trend is increasing the demand for beverages by 0.21% year after year.

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The short-term heat and cold waves have an asymmetric effect on demand.

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Heat waves increase the demand by 2.1% per degree, but the effect of cold waves is negligible.

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1. Introduction

Weather plays an important role in determining the supply and demand for a vast variety of goods

and services. Several firms have acknowledged that billions of dollars are at risk on account of random

changes in weather and climate (Climate Risk Disclosure Project, 2016), and the economic impact of extreme

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weather, such as unusually warm winters, or events, such as Hurricane Sandy, is often measured and reported.

However, studies such as those by the U.S. National Climate Assessment (NCA), National Oceanic and

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Atmospheric Administration (NOAA), and the Inter-Governmental Panel on Climate Change (IPCC) point

towards two systematic temperature-related issues whose impact is seldom discussed or accounted for in

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supply chain planning and execution. These are (a) the temperatures in the U.S. showing an increasing trend,

and (b) short-term aberrations in temperature, such as heat and cold waves, becoming more frequent as well

as more extreme.
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In the present study, we isolate the impact of temperature on the demand for six liquid refreshment

beverage (LRB) categories in the U.S., namely carbonated soft drinks, plain water, iced tea, fruit drinks,
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flavored water, and sports drinks. Further, we partition this impact into two parts: the effect of the long-term

trend and that of short-term aberration, such as heat/cold waves, using a two-step (T-S) econometric model
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(Murphy & Topel, 2002). Though the use of T-S models is common in macro-economics and finance, its use
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for partitioning the impact of temperature on consumer demand and subsequently linking the long-term

impact to strategic decisions and the short-term impacts to operational decisions is unique and a key
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contribution of this paper.

We also propose and establish the existence of an asymmetric effect of short-term aberrations in
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temperature on consumers beverage purchase behavior and estimate it by incorporating the reference point
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formulation within the T-S model structure. An asymmetry in effects of short-term aberrations implies that

the impact of a heat wave is different in magnitude (and not just in valence) than the impact of an equivalent

cold wave. Similar asymmetric effects have been observed in other consumer behavior linked studies and it

has been shown that the existence of an asymmetry has important policy implications (Kalyanaram & Winer,

1995).

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Our research uses an empirical analysis of (a) monthly temperature data collected for 52 U.S. markets

over 10 years and (b) weekly LRB sales data for the six categories from 20122015 for the same 52 U.S.

markets to exemplify the proposed methodology and implications. The T-S model uses the 10-year monthly

data in an auxiliary long-term temperature trend model in the first step and a demand (volume) model with

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the 3-year weekly data with imputed estimates of the temperature trends in the second step. Though we have

focused on the impact of temperature on LRB demand, the T-S based estimation methodology lays the

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foundation for incorporating the effect of factors such as precipitation, macro-economic conditions, and

brand equity on consumer demand. These factors have long-term as well as short-term effects that need to be

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partitioned as they have unique strategic and operational implications.

The paper is organized into six sections. We provide an extensive literature review in Section 2, the

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proposed T-S estimation model in Section 3, and the results for the estimation of the impact of temperature
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on the sales of the six LRB categories in Section 4. These six categories together account for more than 87%

of the LRB sales within the U.S. The impact of long-term temperature trends on the facility location problem
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and short-term temperature aberrations on the inventory management problem is discussed in Section 5. The

conclusions and potential extensions of the work are presented in Section 6.

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2. Background
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Our literature review covers four topics: We look into (a) the research on climate change, specifically,

related to temperature trends within the U.S.; (b) the literature on the impact of temperature on consumer
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demand and LRB sales; (c) the econometric studies that enable partitioning of impact of long-term trends

from short-term aberrations in temperature; and, (d) the research on the use of the reference point effect to
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capture asymmetry in effects of a heat wave versus a cold wave.

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2.1. Temperature trends and models

2.1.1. Temperature trends

There has been a lot of discussion in the U.S. on whether climate change is occurring and/or

temperatures are increasing. This review focuses mainly on studies conducted by NOAA, the NCA, and the

IPCC and discusses the findings therein. Further, the focus is only on two key issues relevant for the U.S.:

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The U.S. weather is getting noticeably warmer and the rate of increase is not uniform across

geographies.

o The NCA third report (Melillo, Richmond, & Yohe, 2014) stated, Americans are noticing

changes of weather all around them. Summers are longer and hotter, and extended periods of

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unusual heat last longer than any living American has ever experienced. Likewise, even though

all regions in the U.S. have experienced warming, the warming is not uniform across the country;

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temperatures are rising more quickly in the north. Further, the same report states that

temperatures are projected to rise another 2F to 4F in most areas of the U.S. over the next

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three decades.

o Likewise, the IPCC Fifth Assessment Report (AR5; IPCC, 2014; Huang & Liu, 2014) stated that

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the period from 1983 to 2012 was likely the warmest 30-year period of the last 1,400 years in the
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Northern Hemisphere.

o NOAA (NOAA, 2015) reported a 2.4F increase in the 2015 temperatures in the U.S. over the
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20th-century average and classifies 2015 as the second warmest year in the 121-year period of
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record for the contiguous U.S. The warmest year on record was 2012 when the annual average

temperature was 55.3F. Furthermore, 2015 marks the 19th consecutive year that the annual
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average temperature for the contiguous U.S. is above the 20th-century average. The last year with

a below-average temperature was 1996.

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o Kunkel et al. (2013) used NOAAs National Climatic Data Center data to examine temperature

and climate trends in their report. They concluded,

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Annual temperature trends are upward with magnitudes varying from 0.09 to 0.20F per decade and
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the U.S. as a whole has experienced statistically significant warming since 1895 in all seasons. This

warming has not been uniform in space. Warming has been greatest in the west and north.

Short-term temperature aberrations (i.e., short duration heat waves and cold waves) have become

more common and more extreme.

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o Heat waves, or periods of abnormally hot weather lasting days to weeks, have generally become

more frequent across the U.S. in recent decades as reported by Melillo et al. (2014). Heat waves

and droughts in Texas in 2011 and the Midwest in 2012 set records for highest monthly average

temperatures, exceeding some previous records, including the highest monthly contiguous U.S.

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temperature on record (July 2012, breaking the July 1936 record) and the hottest summers on

record in several states (New Mexico, Texas, Oklahoma, and Louisiana in 2011 and Colorado

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and Wyoming in 2012). Additionally, the last decades have exhibited an increasing trend in

persistently high nighttime temperature.

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o Melillo et al. (2014) also reported that cold waves have become less frequent and intense across

the U.S., reaching the lowest levels on record since 1895.

2.1.2. Temperature models

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Climate models for the U.S. are generally econometric in nature and are developed using mean,

maximum, and minimum temperature data from selected stations from the U.S. Historical Climatology
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Network (Boden, Karl, Williams, & Quinlan, 1990). A lot of emphasis is given to the data collection and
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preprocessing process itself. For example, (a) stations chosen for use in the climate models must have a low

percentage of missing data within each year as well as for the entire period of record; (b) the data needs to be
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adjusted for non-homogeneities; (c) adjustments need to be made to account for time biases; (d) urban heat

island effects need to be accounted for; and, (e) the bias on account of the introduction of the maximum
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minimum thermistor and its instrument shelter needs to be controlled for (Karl, Williams, Young, &

Wendland, 1986; Quayle, Easterling, Karl, & Hughes, 1991). Posteriori adjustments include station and
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instrumentation changes (Karl & Williams, 1987). Once data has been obtained and preprocessed, extant
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literature primarily relies on statistical models (regression or ARIMA based) or using black-box approaches

such as the use of artificial neural networks (Shukla & Jharkharia, 2013). Advanced models1 that make long-

term climate change estimates sometimes use additional information such as the anthropogenic greenhouse

1 Since our focus is on using the estimates of temperature trends and fluctuation from historic data, we limit the
literature review on advanced temperature prediction models. Readers are referred to Lorenc (1986), Katz and Murphy
(1997), and Saha et al. (2010) for further details.

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gas emissions (IPCC, 2014). Other modeling approaches include stochastic modeling based methods such as

those proposed by Xue, Leetmaa, and Ji (2000) which use a series of seasonally varying linear Markov models

constructed in a reduced multivariate empirical orthogonal function.

2.2. LRBs

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2.2.1. The LRB category

LRBs include beverages such as carbonated soft drinks (CSDs), water, carbonated water, fruit juice,

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juice drinks, energy drinks, sports drinks, milk, coffee, and concentrates. Coke, Pepsi, Mountain Dew, Dr.

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Pepper, Gatorade, and Nestle Pure Life are the leading brands of LRBs in the U.S. and together had a 44%

market share (by volume) in 2015. The Beverage Marketing Corporation reported that the LRB market in the

U.S. has been growing, and the supply chain handles demand for about 30.9 billion gallons of beverages every

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year. Facility location is, therefore, an important strategic decision for the beverage companies.
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However, even though the LRB category is growing, its constituents such as CSDs and fruit drinks

are witnessing a declining trend; CSDs have been losing both their volume and market share since the early
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2000s (Beverages Digest; 2016). In the mean-time, the demand for low caloric alternatives, such as bottled
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water, has been increasing (Huang & Liu, 2014). Storey (2010) reported that the share volume of bottled

water rose from 11.1% in 1988 to 29.1% in 2008, representing a 162% increase. The beverage companies
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therefore need to manage the change in the mix of the demand.

Further, the demand patterns show variations across geography. The growth in the sports beverage
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segment is very regional and exceeded one billion gallons for the first time in 2011 and topped 1.4 billion

gallons in 2014. The demand for fruit juice and fruit drink is regional as well and shows significant changes
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based on supply of raw material such as oranges, apples, and grapes. The beverage companies thus need to
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manage the regional preferences and changes therein.

2.2.2. Impact of temperature on LRB sales

Academic literature linking temperature to LRB demand is very limited. Mirasgedis, Georgopoulou,

Sarafidis, Papagiannaki, and Lalas (2014) focused on the impact of climate change in Greece on the future

sales for bottled water and nonalcoholic beverages for the time period 20212050. The authors developed a

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log-linear regression model to see the impact of estimated products over climate change and find that the

sales of the beverages could increase considerably under the future warmer climate associated with the IPCC

predictions for the region. Similarly, Murray, DiMuro, Finn, and Leszczyc (2010) studied how weather (i.e.,

temperature, humidity, snowfall, and especially sunlight) can impact consumer spending on tea. The authors

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built a quadratic regression model to estimate the sales as a function of weather with a persons mood being a

mediating variable. They noted that people tend to consume more tea when good weather such as sunlight

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has a positive impact on a persons mood.

Some researchers such as Chen and Yano (2010) have started to look at different contract types

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between the retailer and manufacturer to hedge the risk from seasonal products whose demand is weather

sensitive. Rather than regression model, the authors implemented a Stackelberg game between two firms

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where the manufacturer as Stackelberg leader chose contract terms and wholesale prices. They showed how
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the manufacturer completely hedges his risk of offering a rebate by paying a risk premium for a weather

derivative of a form that is commonly traded in practice.

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2.3. Two-time scale systems

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Though research quantifying the short-term and long-term impact of temperature changes on

beverage consumption and sale is sparse, several researchers have investigated the two-time scale impact of
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temperature in other domains. For example, Bentzen and Engsted (1993) looked at the short- and long-term

impact of temperature on energy consumption. They indicated that the short-term impact is very different
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from the long-term impact and highlight that partitioning models in the short- and long-term elasticities

allows the determination of which variables are important for what scenarios. Knorr, Prentice, House, and
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Holland (2005) and Dosta et al. (2008), who studied the impact of temperature on environment, also reached
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a similar conclusion; it is therefore imperative to address the two-time scale nature of the impact of

temperature.

Other than the two-time scale impact of temperature, a rich body of literature focuses on the

modeling and estimation of two-time scale systems (Dekimpe & Hanssens, 1999; Gallaway, McDaniel, &

Rivera, 2003; Kirschen, Strbac, Cumperayot, & de Paiva Mendes, 2000; Silk & Joutz, 1997). From a modeling

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perspective, the most popular approach for handling the two-time scale system is through the use of T-S

modeling (Murphy & Topel, 2002). The T-S approach requires building two models: The auxiliary model is

first developed and estimated for the phenomenon that displays slower dynamics, and the subsequent main

model is developed and estimated. The main model uses the estimates from the auxiliary model. The use of

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T-S models is popular in fields such as macroeconomics (Mishkin, 2007) and dynamic optimization (Sargent,

1978), and prior research has shown that the T-S procedure yields consistent estimates under fairly general

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conditions (Murphy & Topel, 2002).

2.4. Reference point effect

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Though the T-S models enable the partitioning of the long-term effects from the short-term, they do

not capture the potential asymmetry in the effect of the heat and cold waves. Theories based in behavior

economics suggest the following:

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Consumers often look at the gap between the expected (reference value) and the actual and link it to

a loss or gain in utility.

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Consumers often weigh the losses differently (and usually more heavilya phenomenon called loss
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aversion) than the gains. Thus, the consumers response is influenced by the valence of the gap,
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which leads to an asymmetry in the effect of a gain versus a loss in utility.

This asymmetry in effect around a point is called the reference point effect. The reference point effect has
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been very successful in explaining how consumer demand responds to factors such as price changes

(Kalyanaram & Winer, 1995), changes in product choice (Hardie, Johnson, & Fader, 1993), and changes in
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the quality of service provided to the consumer (Bolton, 1993).

Applied researchers have also pointed out that the reference point effect can also effectively capture
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a consumers asymmetric response to a stimuli, especially when the response is asymmetric s-shaped.

Alternatively, researchers such as Hardie et al. (1993) and Kalyanaram and Winer (1995) pointed out that the

reference point effect operationalizes the Prospect theory (Fiegenbaum, Hart, & Schendel, 1996; Kahneman

& Tversky, 1979) that has been shown to explain how consumers choose between probabilistic alternatives. It

unifies the identification of the consumption utility and the gainloss utility under one structure.

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2.5. Summary

The literature review indicates that the link between systematic changes in temperature and consumer

behavior has not been quantified, and this paper focuses on quantifying the link in the LRB category. Further,

we posit that the impact of the short-term aberrations in temperature on consumer demand for beverages is

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aligned with the reference point related theories in behavior economics (Kszegi & Rabin, 2006). We

therefore expect the following:

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a) A consumers response to changes in temperature is reference point dependent.

b) A short-term increase in temperature as compared to a reference temperature increases the

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consumers consumption utility while a decrease in temperature as compared to a reference

temperature decreases the consumers consumption utility.

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c) An increase in temperature as compared to a reference point has a stronger impact on demand as
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compared to an equivalent decrease in temperature as compared to the reference point.
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We aim to test for the existence of an asymmetric effect of short-term aberrations in temperature on

consumer purchase behavior and estimate it using the reference point formulation within the T-S model
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structure.
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3. Model

We use the T-S modeling and estimation approach (Murphy & Topel, 2002; Wooldridge, 2010) to
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partition and estimate the long-term and short-term impact of temperature on beverage demand.

Temperature trends are derived from auxiliary models that use time series that span a long duration with data
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being sampled less frequently (i.e., monthly) while the impact of the temperature aberrations is captured using
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weekly data.

3.1. Long-term temperature trend model (auxiliary model)

Let
, be the temperature in market  in month   . We propose Equation (1) to decompose the

temperature into a linear trend and a seasonality by using an additive model structure. Here,  is the

intercept term, or constant, of the model,

 is the coefficient that captures the strength of the linear trend in

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temperature in market , , captures the seasonality, in other words, the month-to-month change in

temperature in market  as compared to the temperature in month = 1 (January), , are a set of

indicator variables (dummy variables) for the months in a year, and finally , are the residual term. Please

note that the data is collected over 10 years for 52 market zones. Considering there are 12 months in a year,

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the time horizon would have 120 data points.


,  =  +
  +  , ,  + ,   1,2, 52,   1,2, 120


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(1)


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The dummy variables ,  in the Equation (1) take values within interval [2, 12] to represent 11

months of the year. Each dummy variable has only two values, 0 and 1. It takes the value of 1 if the   -

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observation belongs to month , where 2, 3, 12, and 0 otherwise. We have used modulo function to
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convert   ,   1,2, 120 into ,  where ,  0,1 as follows:

1 for = mod&&t  1)/12) + 1, 2, 3, 12,   1,2, 120

,  =
0 otherwise
(2)
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The model proposed under Equations (1) and (2) can be estimated using ordinary least squares
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(OLS). Difference models or models using auto-regressive terms are not used, as the objective of the model is

to estimate the long-term trend. Instead, we focus our attention on the characteristics of the error term , .
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For short-term temperature aberrations (i.e., week-to-week temperature aberrations) the month-to-

month seasonality , in market  captured in Equation (1) can be converted to weekly seasonality using a
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cubic spline function. If we notate 0, as the weekly seasonality where  represents the market and  the
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time in weeks, then

0, = 12, , ,   3,
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(3)

where 1 is the cubic spline function. Note that = 1 is not included in the model presented as Equation (1)

to avoid perfect collinearity with the market dummies; consequently, all the , coefficients can be

interpreted as the seasonality as compared to ,  when = 1 (Wooldridge, 2010). Thus, , = 1.

3.2. Short-term temperature aberrations

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Following Hardie et al. (1993), we propose to measure the impact of week-to-week temperature

aberrations using two definitions for temporal reference values of temperature: a moving average based

reference point (Equations 6 and 7) and historical average based reference point (Equations 8 and 9).

The moving average base temporal reference value of temperature in market 4 in week 5, 6&7)4,5 ,

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is defined as an exponentially smoothed average of past observations:

8&9), = : 8&9),; + &1 : )
,; , ;  > 1, 0 : 1 (4)

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8&9), =
, (5)

where
, is the temperature in market  in week  and : refers to smoothing constant. Then the

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deviation variables are obtained when the moving average based reference point 8&9), is used. These are

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&9)@
, and
&9), defined in Equations (6) and (7), respectively.
;
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, 8&9), B1
, > 8&9),

&9)@
, = A
(6)
0 B1
, 8&9),

8&9),
, B1
, < 8&9),

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&9);
, = A
(7)
0 B1
, 8&9),

The historical average based reference point 6&E)4,5 is estimated using the average temperature
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F4,5 in market 4 during week 5. The number of years to use for the average and the data cutoff date for the
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average are user-defined inputs. Note that 6&E)4,5 = 6&E)4,5@GH for a year with 52 weeks. The deviation

variables are obtained when the historical average based reference point 6&E)4,5 is used, F&E)@
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4,5 and

F&E);
4,5 are defined in Equations (8) and (9), respectively.

, 8&I), B1
, > 8&I),

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&I)@
, = A
(8)
0 B1
, 8&I),
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8&I),
, B1
, < 8&I),

&I);
, = A
(9)
0 B1
, 8&I),

3.3. Sales model

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Consistent with extant literature on econometric models for market response (Hanssens, Parsons, &

Schultz, 2003; Shaikh & Prabhu, 2017), we propose a log-linear of the form presented in Equation (10) where

J, is the log of the sales in market  at time .

J, = K + L
&
)  + M 0, + NOP
&Q)@
, + RST
&Q), + U, + ,
;
(10)

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The terms NOP
&Q)@
, and RST
&Q), represent the deviation variables: Q 9, I. The errors
;

are assumed to be normal with a known variance. L

&
)  captures the impact of the temperature trend

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(where
&
) is obtained from Equation 1), M 0, captures the impact of the temperature related

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seasonality (obtained from Equation 3), and U, is a function that controls for all the non-temperature

related sales influencers. U, is comprised of various marketing-mix variables as well as non-marketing sales

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drivers and influencers such as product availability, competitive activities, and macro-economic conditions.
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Finally, K is the intercept or constant for the regression model.

&X) &X) &XX) &XXX)

U, = 1 VW , W;Y , W , W Z (11)
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&X)
W in Equation (11) is a vector of marketing interventions such as television support, digital display, digital

&XX)
search, social media, radio, print, coupons; W
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is a vector of control factors such as various

&XXX)
macroeconomics and environmental factors; and, W
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is comprised of beverage-specific trends seasonality,

trend variables, measures of competitive action, and the firms own nonmarketing variables. The subscripts
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 [ represent the possible lagged effects. The specific functional form of U, depends on several factors;

the most common is the multiplicative form, which along with the log transformed sales yields a linear in
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&X) &X) &XX) &XXX)

parameter model. Note that the inputs [W , W;Y , W , W ] could contain transformed variables, adstock
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variables, lagged variables, or even interaction terms. The log-linear models proposed under Equation (10)

can be estimated using OLS with the variance-covariance matrix adjusted for step 1 sampling errors as

described in Murphy and Topel (2002).

4. Results

4.1. Data description

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4.1.1. Temperature data

Historical temperature data spanning 10 years was collected for the 52 market zones from the

NOAA National Climatic Data Center. The data was available at a monthly level (average in Fahrenheit), and

the descriptive statistics are presented in Table 1. Other weather-related data such as precipitation was also

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collected for control variables in Equation (10).

Variable Mean Std. Dev. Min Max

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Temperature (in Fahrenheit) 56.70 17.26 4.05 92.60
Precipitation (in inches) 764.70 537.01 0.00 3943.80

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Table 1. Statistics across 52 markets

The temperatures and the aberrations therein differ by geography. For example, the temperatures

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range from 4.05F to 75.64F for the Minneapolis market (with a mean of 42.81F and standard deviation of
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21.35), while the standard deviation in the temperatures is only 6.64 in the Miami market (with a mean of

75.58F). The month-to-month variation of temperatures across 10 years for four markets is presented in
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Figure 1.
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Figure 1. Month-to-month variation in temperature

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4.1.2. Scanner data for the LRB category

The revenue and volume share of various LRB sub-categories in the grocery channel for 2014 are

presented in Table 2. As discussed in the literature, CSDs by far have the highest revenue share. Water has a

volume share that is comparable to CSDs but a lower share of revenue, and finally concentrates have the

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lowest share in volume.

Beverage Type Volume Share 2014 % Revenue Share (2014)

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CSDs 34.46 33.49
Bottled water 33.52 14.35

SC
Fruit drinks 8.88 11.39
Fruit juice 7.31 15.22
Tea 5.00 5.59

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Sport drinks 4.23 5.59
Flavored water 3.43 4.22
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Milk 1.66 3.87
Energy drinks 0.61 3.06
M

Vegetable juice 0.54 1.38

Coffee 0.26 1.12
Lemon lime 0.08 0.39
D

Concentrates 0.03 0.78

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Table 2. Market share of key LRB sub-categories

In this paper, we mainly focus on the demand for the CSD, bottled water, fruit drinks, tea, energy
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drinks, and sports drink sub-categories. Agricultural outputs and raw material supplies constrain the products

prices for three sub-categories: fruit juice, vegetable juice, and milk. Therefore, they are not considered in this
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analysis. Three years (April 2012March 2015) of weekly sales data for all the sub-categories within the LRB
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category was collected for 52 major U.S. market zones,2 which together cover about 87% of the scanned sales

of LRBs in all of the U.S. through the grocery channel. The data is similar to the standard scanner sales data

provided by syndicated data sources, such as AC Nielsen and IRI, and is popular in econometric and time

2 The 52 market zones, though geographically located, can be very different in size both from an area as well as
size perspective. Some market zones span multiple states while some states such as California, Florida, and Texas have
multiple market zones.

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series analysis of marketing mix (Hanssens et al., 2003). The scanner data set also includes information for

product availability (distribution), variety (number of items), prices, and merchandising. Marketing

information is made available from media agencies.

4.2. Estimation stage I: long-term temperature trends

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Temperature seasonality and trends across markets are estimated for each of the 52 markets using

Equation (1). The descriptive statistics of these parameters are presented in Table 3.

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Seasonality/Trend Mean Std. Dev. Min Max
Temperature trend 0.002 0.008 -0.011 0.023

SC
Dec 7.784 1.992 3.745 12.123
Nov 16.690 3.653 7.914 24.802
Oct 25.127 5.268 11.262 36.304

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Sep 30.626 6.492 13.100 43.549
AN
Aug 31.876 7.011 13.065 45.510
Jul 28.811 6.618 11.554 41.840
Jun 22.574 5.416 8.840 33.683
M

May 14.293 3.568 5.340 22.028

Apr 6.121 1.839 1.811 9.748
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Mar -0.039 1.123 -2.296 2.344

Feb -2.221 0.875 -3.698 -0.512
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Table 3. Temperature seasonality and trends in 52 markets

Fifty-two models (Equation 1; one for each market) are estimated using OLS. The estimated
&
)
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coefficients, their t-stat, the DurbanWatson statistics for autocorrelation in error, and the Anderson Darling

test for the normality of the errors are presented in Table A1 in Appendix A. The results indicate that errors
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are normally distributed with no detectable auto-correlation, thus satisfying the conditions for a T-S
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estimation process to be consistent. Results also show that markets in the Southwest U.S., such as California

and Nevada, show the highest positive trend in the temperature while markets in the Northcentral U.S., such

as Minneapolis and Milwaukee, witness strong seasonality. The geographical distribution of the estimated

temperature trends is presented in Figure 2. The red color indicates a strong positive temperature trend while

blue indicates a strong negative temperature trend (i.e., the temperatures have been declining).

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RI
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Figure 2. Observed temperatures trends across U.S. (20052015). The colors of the map show the

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temperature trend observed from 10 years of data. The states colored in red show the strongest trends.
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4.3. Estimation stage II: volume models

We used Equation (10) to estimate the impact of temperature on the sales volume while controlling
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for various sales drivers, such as distribution, merchandising, marketing mix, and macro-economic conditions.

We estimated three model specifications and two levels per each model (a total of six models):
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Model 1 uses the moving horizon-based reference values to capture the impact of short-
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term, week-to-week temperature aberrations.

Model 2 uses the historical average-based reference values to capture the impact of short-
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term, week-to-week temperature aberrations.

Model 3 is the base model wherein the temperature variable has not been decomposed.
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Since there are 52 markets, we could potentially build 52 different models, one for each market, when
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all the 52 markets are assumed to be heterogeneous, or we could build one model by pooling the data from all

52 markets together and assuming that all the 52 markets are homogenous. The pooled model is generally

called the aggregate model while the 52 models are called the disaggregate models. However, neither 1 nor 52

models are optimal; instead, there is a need to build ^ models where 1 ? ^ ? 52 by developing ^ clusters of

similar markets and pooling the data for markets that belong to the same cluster. The optimum ^ is

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determined using a model selection criterion such as the 8 adjusted, Bayesian Information Criteria (BIC) or

the Akaike Information Criteria (AIC) that weight the quality of the model fit while penalizing for the number

of parameters used (over-fitting) in the models.

Latent class regression (LCR; Vermunt, 1997; Ramaswamy, Desarbo, Reibstein, & Robinson, 1993)

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allows the modeler simultaneously to cluster the data into ^ classes and fit a regression model in each class.

The LCR models first segment the input data into multiple homogenous classes and subsequently estimate

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the regression model separately for each homogenous class. The LCR model can thus be used to capture

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unobserved heterogeneity in the data, which may arise due to factors such as the differences in consumer

sociodemographics and product preferences across time and space (geography). An LCR model with one

class is the same as the pooled aggregate level model while the LCR model with 52 classes is the same as the

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disaggregate market level model. In this paper, we used LCR to determine the optimum aggregation level for
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the models. We determined the optimum ^ for each model (i.e., Model 1Model 3 for each beverage typea

total of 3*6=18 models) and used BIC as the model selection criterion. The smaller the BIC, the better is the
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model.
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The BIC3 for Models 13 with 13 latent classes is presented in Table 4. Here, each class represents a

latent cluster (i.e., Class 1 contains one homogeneous cluster, whereas Class 2 contains two homogenous
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clusters, and Class 3 has three latent clusters). The BIC systematically increases as the number of latent classes

increases, indicating that the model with 1 latent class (i.e., the aggregate model) can be preferred over more
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disaggregated models. We will thus focus on aggregate models (i.e., Models 13 with 1 Class) henceforth in

this paper.
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3 The pattern is consistent when we change the BIC measure to the AIC measure.

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Bottled Fruit Sports Flavored

Model Class CSDs Tea
water drinks drinks water
Class 1 12,768.2 9,168.6 8,170.1 8,002.5 6,563.3 4,890.6
BIC Model 1 Class 2 12,829.1 9,179.4 8,168.2 8,216.6 6,693.2 4,999.2
Class 3 13,112.0 9,331.9 8,219.1 8,444.1 6,819.9 5,212.3
Class 1 12,773.8 9,167.2 8,173.8 8,001.0 6,566.7 4,892.2

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BIC Model 2 Class 2 12,841.4 9,177.7 8,181.3 8,209.1 6,697.1 5,007.9
Class 3 13,110.3 9,334.1 8,228.2 8,441.1 6,822.4 5,213.3
Class 1 12,812.9 9,199.2 8,199.0 8,011.9 6,571.2 4,899.5

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BIC Model 3 Class 2 12,919.1 9,201.3 8,210.2 8,216.3 6,702.1 5,021.2
Class 3 13,317.2 9,377.8 8,231.9 8,447.7 6,827.1 5,227.0

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Table 4. BIC measures for 13 class LCR models

The results corresponding to Models 1 and 2 are presented in Tables 5 and 6 respectively. The

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comparison of the contributions made by key temperature term, which is the expected temperature value
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obtained by coefficient * temperature for year 2014, across the two models is presented in Table 7, while the

percentage change in volume (2014 versus 2013) attributed to temperature is presented in Table 8. The results
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for the base model (i.e., Model 3) are presented in Tables 9 and 10, where Table 9 provides the coefficients

and the means and Table 10 provides the change in volume (between 2014 and 2013) that can be attributable
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to temperature. The key insights from these models are as follows:

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The change in volume (between years 2014 and 2013) that can be attributable to changes in

temperature from the base Model 3, wherein the impact of temperate is not partitioned, is very low
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as compared to the volumes attributed to changes in temperature from Models 1 and 2. Models 1

and 2 estimate an average increase in demand for beverages of about 0.25% (volume) year over year
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on account of the increasing temperature while Model 3 estimates about 0.12%. We believe that the
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0.12% number is on the lower end as

o The impact of the temperature trend in Model 3 is confounded with the impact of beverage

trend.

o The impact of the temperature seasonality in Model 3 is confounded with the impact of

beverage seasonality.

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Though the overall goodness of fit for Models 1 and 2 are similar (with Model 1 outperforming

Model 2 slightly on the basis of BIC metrics in Table 4), the percentage change in volume attributed

to the temperature trend and the variations in temperature are significantly different for the two

models. Model 1 attributes more volume change to the trend while Model 2 attributes more volume

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change to the temperature aberrations.

The impact of long-term temperature trends is statistically significant for all six LRB sub-categories

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(see Tables 5 and 6). Sports drinks and fruit drinks show the strongest impact of the temperature

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trend.

LRB sales are increasing by 0.21% year over year on account of increase in temperature (see Table 8).

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The impact of short-term temperature aberrations, especially short bursts of increases in temperature

from the expected, are statistically significant for all six LRB sub-categories (see Tables 5 and 6).
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Sports drinks followed by water are most impacted by these short temperature bursts (positive

deviation from the reference points).

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The volume contribution on account of heat waves (i.e., positive deviations from reference point) is
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approximately 2.8 times higher than the volume contribution from cold waves (i.e., negative
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deviation from the reference point) for Model 1 (see Tables 5 and 7) and 2.9 times higher for Model

2 (see Tables 6 and 7). This result indicates that the asymmetry in the effect of a heat wave is
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consistent across different specifications for the reference point.

Model 1 suggests that LRBs gain about 2.3% volume per degree of temperature gain during a heat
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wave and lose about 1.1% volume per degree of temperature loss during a cold wave. Model 2 on the
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other hand suggests that LRBs gain about 3.1% volume per degree of temperature gain during a heat

wave and lose about 0.9% volume per degree of temperature loss during a cold wave.

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CSDs Bottled Water Fruit Drinks Tea Sports Drinks Flavored Water
Variables
Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean
Intercept -1.4487* -0.5938* -5.1112* -1.7349* -6.3110* -3.1634*

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Temp trend 0.0183* 0.293 0.0159* 0.293 0.0258* 0.293 0.0251* 0.293 0.0492* 0.293 0.0191* 0.293
Reference pt. 0.0000 -0.017 0.0000* -0.017 0.0000* -0.017 0.0000* -0.017 0.0000* -0.017 0.0000* -0.017

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Pos. dev. 0.0162* 1.841 0.0364* 1.841 0.0183* 1.841 0.0213* 1.841 0.025* 1.841 0.0191* 1.841
Neg. dev. -0.0081* 1.867 -0.0052 1.867 0.0004 1.867 -0.0074* 1.867 -0.0331* 1.867 -0.0147* 1.867

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Beverage trend -0.0005* 145.500 -0.0001* 145.500 -0.0005* 145.500 0.0003* 145.500 -0.0005* -0.002 -0.0004* 145.500
Seasonality 0.6967* -0.002 0.8301* -0.004 0.3993* -0.002 0.7757* -0.002 1.0361* 145.500 0.8607* -0.002

R value

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0.97 0.95 0.97 0.98 0.96 0.95
*The variable is statistically significant at an alpha level of 0.05.

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Table 5. Regression results of model 1: moving average based reference point model

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CSDs Bottled Water Fruit Drinks Tea Sports Drinks Flavored Water
Variables
Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean

D
Intercept -1.4175* -0.3723 -5.2048* -1.6096* -5.9442* -3.1692*

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Temp trend 0.0166* 0.293 0.0110* 0.293 0.0237* 0.293 0.0214* 0.293 0.0423* 0.293 0.0162* 0.293
Reference pt. 0.0000 -0.017 0.0000* -0.017 0.0000* -0.017 0.0000* -0.017 0.0000* -0.017 0.0000* -0.017
Pos. dev. 0.0157* 1.737 0.0474* 1.737 0.0222* 1.737 0.0332* 1.737 0.0463* 1.737 0.0224* 1.737
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Neg. dev. -0.0032* 2.212 -0.0080* 2.212 0.0001 2.212 -0.0081* 2.212 -0.0271* 2.212 -0.0101* 2.212
Beverage trend -0.0005* 145.500 -0.0001 145.500 -0.0005* 145.500 0.0003* 145.500 -0.0004* 145.500 -0.0003* 145.500
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Seasonality 0.6921* -0.002 0.8375* -0.004 0.3936* -0.002 0.7739* -0.002 1.0435* -0.002 0.8540* -0.002
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R value 0.97 0.95 0.97 0.98 0.96 0.95

*The variable is statistically significant at an alpha level of 0.05.

Table 6. Regression results of model 2: historical average based reference point model

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CSDs Bottled Water Fruit Drinks Tea Sports Drinks Flavored Water
Variables
M% H% M% H% M% H% M% H% M% H% M% H%
Temp. trend 0.54 0.49 0.47 0.32 0.75 0.69 0.74 0.63 1.44 1.24 0.56 0.47
Reference pt. 0.00 0.00 -0.09 -0.07 0.12 0.12 -0.46 -0.45 -0.55 -0.53 -0.42 -0.41

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Pos. dev. 2.91 2.72 6.62 8.14 3.34 3.72 4.00 5.72 4.51 8.13 3.41 3.82
Neg. dev. -1.41 -0.73 -1.07 -1.82 -0.12 -0.10 -1.42 -1.72 -6.20 -5.92 -2.81 -2.31

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Beverage trend -7.34 -7.08 -1.73 -0.84 -7.72 -7.43 3.85 4.54 -6.58 -5.68 -5.32 -4.98
Seasonality -0.13 -0.13 -0.31 -0.31 -0.08 -0.08 -0.15 -0.15 -0.20 -0.20 -0.16 -0.16

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Temp. effect 0.69 0.69 0.94 0.88 1.20 1.18 0.53 0.57 0.72 0.92 0.20 0.22

Table 7. Comparison of contributions of temperature-related factors in the reference point models (M represents the model that uses a moving average-

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based estimation of the reference point while H represents the model that uses historical average. The 0.54% contribution of Temp. trend in CSD

indicates that 0.54% of the CSD volume in the given year can be attributed to the temperature trend)

M
CSDs Bottled Water Fruit Drinks Tea Sports Drinks Flavored Water
Variables
M% H% M% H% M% H% M% H% M% H% M% H%

D
Temp. trend 0.19 0.17 0.17 0.12 0.27 0.25 0.26 0.22 0.51 0.44 0.20 0.17

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Reference pt. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Pos. dev. -0.03 0.00 -0.08 -0.01 -0.04 -0.01 -0.05 -0.01 -0.05 -0.01 -0.04 -0.01
Neg. dev. 0.01 0.02 0.01 0.05 0.00 0.00 0.01 0.04 0.04 0.15 0.02 0.06
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Beverage trend -2.62 -2.53 -0.62 -0.30 -2.76 -2.65 1.37 1.62 -2.35 -2.03 -1.90 -1.78
Seasonality 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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Temp. effect 0.17 0.19 0.10 0.15 0.23 0.24 0.23 0.26 0.50 0.58 0.20 0.22
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Table 8. Comparison of % change in contribution year over year due to effect of temperature-related factors in the reference point models (M

represents the model that uses a moving average-based estimation of the reference point while H represents the model that uses historical average. The

0.19% change in contribution in Temp. trend in CSD indicates that CSD volume is growing 0.19% year over year on account of temperature trend)

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CSDs Bottled Water Fruit Drinks Tea Sports Drinks Flavored Water
Variables
Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean Coeff. Mean
Intercept -1.2657* -0.3502 -4.9295* -1.8584* -5.5714* -3.1762*

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Temperature 0.0002* 76.470 0.0016* 76.470 -0.0003* 76.470 0.0032* 76.470 0.0051* 76.470 0.0032* 76.470
Beverage trend -0.0005* 145.500 -0.0001 145.500 -0.0006* 145.500 0.0002* 145.500 -0.0003* 145.500 -0.0002* 145.500

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Seasonality 0.6640* -0.002 0.7212* -0.004 0.3621* -0.002 0.7421* -0.002 0.9475* -0.002 0.8237* -0.002

R value 0.97 0.94 0.96 0.98 0.96 0.94

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Table 9. Regression results of Model 3: The base model, wherein the temperature variable is not decomposed

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Bottled Fruit Drinks Sports Flavored
Variables CSDs % Tea %
Water % % Drinks % Water %

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Temperature 0.01 0.09 -0.02 0.18 0.28 0.17
Beverage trend -2.68 -0.28 -2.88 1.19 -1.39 -1.23

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Beverage seasonality 0.00 0.00 0.00 0.00 0.00 0.00

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Table 10. Comparison of year over year effect of temperature-related factors in Model 3

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C EP
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5. Implication for Planning

5.1. Order up to levels in inventory

The results in Section 4 have the following implications (presented in Tables 11 and 12) from an

order up-to level perspective:

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If the predicted temperature for the next week is one degree higher than the moving average of the

temperatures leading up to a given week, the demand for LRBs will, on average, be 2.07% higher.

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The demand for bottled water and sports drinks are most sensitive to short-term temperature

aberrations. Specifically, the demand for bottled water can increase by up to 3.6%4.7% on account

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of a one-degree increase in predicted temperature for a given week as compared to the moving

average-based temperature estimate.

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There is a significant difference between the impacts of a one-degree increase in temperature versus a
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one-degree decrease in temperature. With the exception of flavored water and sports drink (and tea

to a certain extent), the impact of lower temperature, cold wave, does not have a significant impact
M

on the demand, as shown in Table 11.

The demand for CSDs and fruit drinks is relatively insensitive to short-term temperature aberrations.

Change in Volume
TE

Bottled Fruit Sports Flavored

Attributed to CSDs % Tea %
Water % Drinks % Drinks % Water %
Temperature
Model 1: M 1.62 3.64 1.83 2.13 2.51 1.91
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Model 2: H 1.57 4.74 2.22 3.32 4.63 2.24

Table 11. Summary of percentage increase in volume (weekly demand) expected on account of a one-degree
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increase in temperature due to a heat wave

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Change in Volume Bottled Fruit Sports Flavored

CSDs % Tea %
Attributed to Temperature Water % Drinks % Drinks % Water %
Model 1: M 0.81 0.52 0.04 0.74 3.31 1.47
Model 2: H 0.32 0.80 0.01 0.81 2.71 1.01

Table 12. Summary of percentage decrease in volume (weekly demand) expected on account of a one-degree

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decline in temperature due to a cold wave

Note that the percentage changes reported in Tables 10 and 11 can be incorporated directly in the

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inventory economic order quantity (or the order up to levels) based on short-term temperature predictions.

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For example, if the temperature is expected to be 3% higher in a given week (as compared to the

temperatures in the previous weeks, moving average), the demand for bottled water can be expected to be

about 12% higher and that of CSDs about 4.5% higher.

5.2. Facility planning

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We illustrate the impact that the differential long-term temperature trends have on the demand

centers and, consequently, on the location of the distribution facilities. We build upon the single facility
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model discussed in details by Melo, Nickel, and Saldanhada Gama (2009), specifically the p-median location
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problem, which minimizes the total demand-weighted travel distance between demand nodes and facilities

(Hakimi, 1964). The study uses the actual U.S. population growth data from the 2000 and 2010 censuses
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while assuming the following:

The distances between market i and facility j are calculated by the spherical law of cosines:
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`ab = cdef V0B^&[ga ) 0B^2[gb 3 + ief&[ga ) ief2[gb 3 ief2[e^b [e^a 3Z 8 0.6214

Where [ga,b and [e^a,b stand for latitude and longitude of markets i and facility j in radians, R is the
C
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earths radius (mean radius = 6,371 km) and 0.6214 is equivalent to 1 km.

The cost of transportation is assumed to be 1.4 cents per mile per gallon, considered a conservative

estimate.

There are no supply constraints at the distribution facility.

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We consider the demand generated in 52 grocery markets, as described in Section 4. The numbers do

not represent the demand in all of the U.S., which typically is three to seven times higher as grocery

accounts for about 15%40% of the total sales.

Eight scenarios (presented in Table 13) and a base scenario are generated to illustrate the financial

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implications of changes in demand pattern on account of long-term temperature trends. The regions

witnessing temperature changes are based on the results presented in Figure 2 obtained from estimating

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Equation 1.

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Base Scenario Exact Population from the U.S. Census Bureau
Scenario 1 Location estimates based on U.S. Census Bureau reports on 10-year population estimate
Scenario 2 Disproportionate increase in the demand in California on account of temperature

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Scenario 3 Disproportionate increase in the demand in Florida on account of temperature
Scenario 4 Disproportionate increase in the demand in Texas on account of temperature
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Disproportionate increase in the demand in California and Florida on account of
Scenario 5
temperature
Disproportionate increase in the demand in California and Texas on account of
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Scenario 6
temperature
Scenario 7 Disproportionate increase in the demand in Florida and Texas on account of temperature
Disproportionate increase in the demand in California, Texas, and Florida on account of
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Scenario 8
temperature
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Table 13. Demand scenarios

As can be seen in Table 14, the optimum facility location changes under the assumption of
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differential changes in population. Specifically, we observe the following:

If the temperature increases were to be uniform, the optimal facility location would not have changed
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(scenario 1).
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Scenario 2 considers the case when the demand in California increases at a rate that is 50% higher

than the rate that can be explained based on population growth. The optimal location of the facility

to serve such a skewed increase in demand shifts from Louisville, Kentucky, to Nashville, Tennessee.

There is a difference in cost of shipping from Nashville, Tennessee, versus Louisville, Kentucky.

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We see that disproportionate changes in demand in California and Texas play an important role in

determining the optimum facility location due to high cost savings for scenarios 6 and 8.

The lowest two transportation cost savings occurring in scenarios 4 and 5, in which the optimum

facility is changing to Indianapolis from Louisville, are reasonable to happen since these two markets

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are next to each other on the map. This change causes relatively less transportation savings

compared to savings in other scenarios.

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Scenarios Optimum location of facility Potential savings
1 Louisville, Kentucky

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2 Nashville, Tennessee $3,739,200.30
3 Cincinnati, Ohio $919,670.90

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4 Indianapolis, Indiana $766,939.63
5 Indianapolis, Indiana $604,902.28
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6 Chicago, Illinois $15,099,488.34
7 Louisville, Kentucky
8 Nashville, Tennessee $4,808,162.40
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Table 14. Estimated Saving in Annual Transportation Costs After Accounting for the Differential Impact of
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Temperature on Demand

Note that the numbers presented in Table 14 are based on demand estimates for the grocery channel
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only. Assuming that the demand patterns are similar for the other channels, such as mass merchandising and

convenience, gas, and drugs stores, the potential savings can be three to seven times higher than the numbers
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reported in Table 14.

6. Conclusions
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As per the climate risk disclosure made by beverage manufacturing and distributing firms, the
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beverage supply chains are facing an increased risk due to random changes in weather and climate.

Accounting for the potential impact of weather is, therefore, imperative. This paper focuses on measuring the

impact of the systematic components of the impact of temperature on demand, namely the long-term

temperature trend and the short-term temperature aberrations.

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Key Contributions: The impact of long-term temperature trends are estimated using 10 years of

monthly temperature data collected from 52 geographically dispersed locations. Our results indicate that LRB

sales are increasing by about 0.21% year over year due to an increase in temperature (see Table 8). The sales

for sports drinks (0.44%0.51%) and fruit drinks (0.25%0.27%) display a higher sensitivity to the increasing

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temperature trends than other LRBs. The temperature trends measured by the proposed T-S model are

consistent with the long-term trends observed and recorded in other studies such as those by Kunkel et al.

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(2013).

The model also captures how the trends in temperature change across geographies (see Equation 1

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and Figure 2). Markets in the Southwest (i.e., California and Nevada) and the Southeast, specifically Florida,

show the highest positive trend in temperature. This differential trend in temperature by geography is likely to

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cause an unbalanced increase in the future demand, which, in turn, has implication for strategic decisions
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such as facility location and capacity planning. Results obtained in the case study presented in Section 5 (see

Table 14) indicate that the optimal location of the distribution center changes from Louisville, Kentucky, to
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Nashville, Tennessee, when we account for the disproportionate change in the long-term demand for LRBs

on account of temperature trends.

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Further, we proposed and established what impact the short-term aberrations in temperature have on
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the demand for LRBs. Our estimates indicate that heat waves raise the demand by about 2.1% per degree

increase while cold waves decrease the demand by about 0.4% per degree decline in temperature. To the best
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of our knowledge, this is the first paper that proposes and measures the asymmetry in the effects of

temperature changes on consumer demand. Models that do not capture such asymmetry in effects tend to
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measure the average effects, which leads to incorrect policy implications.

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Future Research: Immigration from outside the U.S. and across markets are also influencing the

demand of LRBs. Future research can focus on determining the combined effects of temperature changes

and immigration in the demand of LRBs. Furthermore, this research can be expanded to other industries

such as fashion, tourism, or food. Weather can be expected to impact the demand of many consumer goods

and economic markets; however, research in this area is nascent.

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As temperatures continue to increase across the U.S., this research area will become more prominent.

Researchers have estimated that under the best case scenario with a decrease in global emissions of

greenhouse gases, emissions temperatures will continue to increase by 4.5 to 6.5F by the end of the century,

or, under the business-as-usual scenario temperatures will increase from 6.5 to 8.1F by 2100. The supply

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chain network must continue to operate under all these challenges, and the final outcome should be a resilient

supply chain that can withstand the environmental and migratory impacts expected in the short-term and

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long-term.

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Appendix A

Table A1. Temperature trends across 52 U.S. markets and test statistics

Market Beta t-stat DurbinWatson Anderson Darling

BIR 0.0049 1.3469 2.1539 0.3679

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PHO 0.0030 1.1036 2.5478 0.4786
LR -0.0105 -2.4565 2.2245 0.4152
LA 0.0187 6.7013 1.9262 0.4658

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SAC 0.0198 6.8896 1.7028 0.5547
SD 0.0173 6.2932 1.7443 0.4301

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SF 0.0194 6.8264 1.8240 0.3132
DEN 0.0073 2.0722 2.2362 0.5939
HART 0.0068 1.3083 2.5686 0.3821

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JACK 0.0079 2.5025 1.6964 0.4532
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MIA 0.0090 3.0967 2.0959 0.4480
ORL 0.0075 2.3749 2.1081 0.3523
TAM 0.0075 2.3917 2.1641 0.5960
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ATL -0.0006 -0.1700 2.2299 0.4201

CHI -0.0091 -1.6748 2.1144 0.4116
IND -0.0063 -1.2066 2.3960 0.2877
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DMN -0.0078 -1.3126 2.0605 0.3992

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LOU -0.0048 -1.0931 2.5076 0.2415

NOR -0.0060 -1.6378 1.9841 0.5084
POR 0.0069 1.2073 2.0209 0.6079
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BW 0.0004 0.0963 2.0459 0.3911

WSH 0.0004 0.0963 1.9218 0.3970
BOS 0.0100 1.9304 2.1961 0.4017
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DETR -0.0007 -0.1193 1.9984 0.4537

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GR -0.0009 -0.1651 2.0411 0.3649

MINN -0.0076 -1.0843 1.8322 0.4928
KC -0.0056 -1.0768 2.0247 0.3361
ST -0.0051 -1.0454 1.6001 0.4393
OMA -0.0007 -0.1634 2.3638 0.4823
LSV 0.0226 5.8069 2.0490 0.5920
ALB 0.0057 1.0153 1.5752 0.3563

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Market Beta t-stat DurbinWatson Anderson Darling

BUF 0.0010 0.1661 2.1722 0.3081
NY 0.0053 1.0625 1.6469 0.5108
SYR 0.0052 0.8939 1.4860 0.5371
CHA 0.0000 -0.0072 1.5641 0.3713

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GREE 0.0045 1.2792 1.9628 0.5339
RAL 0.0030 0.8298 2.3647 0.3937
CIN -0.0042 -0.8773 2.5972 0.4461

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CLE -0.0069 -1.3518 2.0101 0.5114
COL -0.0046 -0.9205 2.1345 0.5297

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OKL -0.0021 -0.4875 2.1107 0.4692
PHI -0.0017 -0.3272 1.7720 0.6231
PIT 0.0018 0.3515 2.3375 0.4092

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MEM -0.0101 -2.3684 2.4235 0.4845
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NAS -0.0051 -1.2388 1.4944 0.3556
DAL -0.0029 -0.7271 2.4346 0.4662
HOU -0.0036 -1.0541 1.8679 0.3767
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WTEX -0.0033 -0.8751 1.7417 0.4756

SLC 0.0178 3.6953 1.4229 0.5834
RNOR 0.0035 0.9155 2.2580 0.6338
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SEA 0.0084 2.5891 1.9422 0.4508

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MIL -0.0104 -1.6310 1.8855 0.3846

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Highlights

The impact of changes in temperature on the demand of six beverage categories has been quantified.

This impact is partitioned into a long-term trend and a short-term heat and cold wave effect.

The long-term temperature trend is increasing the demand for beverages by 0.21% year after year.

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The short-term heat and cold waves have an asymmetric effect on demand.

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Heat waves increase the demand by 2.1% per degree, but the effect of cold waves is negligible.

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