Abstract
Pricing strategies have become one of the most important aspects of any business as these give a reflection on everything that a business does, from inception of product development to the final product. Furthermore, price optimisation has the highest impact on increasing company profits. However, these profits are affected by price increases stemming from an increase in input costs. On the other hand, price decreases are often caused by the marking down of non-performing products or reducing prices on the back of a reduction in competitor prices.
Apparel retailers sometimes import textiles and clothing in order to produce and change the styling of garments locally. However, imports of clothing have been increasing steadily, which has reduced the demand for textiles from domestic clothing manufactures. The quantity of textile and apparel that is imported is affected by the unpredictable change in dollar/rand exchange rate. This forces apparel retailers to revise their pricing strategies and amend prices and sell in order to maximise revenue. The aim of this paper is to analyse the impact of the rand exchange rate volatility on pricing strategies within the apparel retail sector. In agreement with existing literature, the paper finds that volatility exhibits a negative relationship with price.
The Engle Granger single equation test for cointegration as well as error correction model (ECM) were used to test whether there are existing long-run and short-run relationships between the following variables: logged Dunns retail selling price (LDRSP) and volatility of exchange rate (VOL), consumer price index (CPI), Dunns cost of sales (DCS), Dunns quantity demanded or sold (DNQ), producer price index (PPI), Edgars retail selling price (ERS), Edgars cost of sales (ECS), exchange rate (EX). The ECM results showed a negative and significant coefficient of adjustment- with a quick adjustment back to equilibrium level. Vector error correction model (VECM) was estimated in order to produce impulse response functions (IRP). These showed that shocks in all the exogenous variables considered do not exhibit permanent effects on prices. When the shocks are experienced or felt by apparel retailers, Dunns retail selling prices increase and decrease accordingly, and then revert to equilibrium level over time.
M.Com.