17 May 2006

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Business Today

Containing the costs of dual pricing

The decision on dual pricing needs to be taken with care to avoid added costs for business

The argument in favour of dual pricing is that it will make customers more familiar with the new currency which our country will be adopting. It makes it easier for customers to compare prices and check that the conversion rules have been observed. Furthermore the use of dual pricing is expected to eliminate the possibility of retailers taking advantage and increasing the prices, as happened in other countries. Thus from the point of view of consumers, dual pricing holds very well.
On the other hand the businessmen of our country, did not come out against dual pricing for a specified period of time. However the first question that comes to mind is whether the price hikes brought about by the adoption of a new currency do in reality result in an extra profit for the business? All costs in respect of the necessary changes to adopt to the new currency are expected to be borne by the business. At this point in time are businesses on a strong footing to be able to sustain further costs without passing them on to consumers?
The costs of introducing dual pricing arise from various changes that ought to be made. To begin with the accounting software used shall have to be able to cope with new situations. A typical situation that would be encountered is the following: A company is still operating in Lm but has to produce documentation expressed in Euros as well. When they start to receive and effect payments in Euros, they will have outstanding invoices in Lm and new transactions in Euros while still accepting both Lm and Euro payments.
Another cost arises due to the fact that businesses have to calculate the price for each item that they have for resale. Though this seems a straightforward exercise, there is no doubt that it is very time consuming. Another uncertainty that arises here is how businesses will be using psychological pricing such as Lm0.99, when it will become EUR2.31. However what we should really concentrate on is on high volume, low price items. In its guidelines the National Euro Changeover Committee (NECC), states that in calculating the EURO price, the resulting price should be rounded up to the nearest Euro cent. So let us take the example of a product costing Lm1.60 on which there is a profit margin of 5%. The converted price would be EUR 3.84 losing EUR0.0034 on each packet with results in 1.82% loss of profit on a retail margin of 5%.
The NECC has also promised that there would be no need to change the cash registers to be able to conform with the dual pricing system; all that would be needed are some changes. Though I am quiet sure that the NECC is right, I have my sincere doubts whether this promise does apply to tailor-made point of sales products. Even though the programmers thereof will find a solution to enable the businesses to keep the existing point of sales programme, one has to ask what cost will this entail?
For now government is proposing that dual pricing comes into being, a year before Malta adopts the EURO that is from 1st January, 2007. The main reason behind this decision, seems to be to enable the Maltese consumer to familiarise himself with the new currency. Furthermore such a decision would force Maltese businesses to start thinking in Euro terms at an earlier stage allowing for a smoother changeover.
Had the rate of exchange for the EURO been fixed, I would be in perfect agreement with the government. However as things stand today, should dual pricing come into being as from the 1st January, 2007, businesses could end up incurring the above mentioned costs twice rather than once; that is once at the central parity rate as at 1st January, 2007 and another time at the end of June when government would have fixed the exchange rate. Furthermore the use of dual pricing at such an early stage could back fire due to the fact that the public would get used to a conversion rate, which could be changed in the middle of the year causing more confusion than it is supposed to eliminate.
Apart from the above-mentioned costs, the use of dual pricing as form the 1st January, 2007 would result in extra unnecessary costs. Due to the fact that at present the banks do not use the central parity rate of EUR1=Lm0.429300, the businesses will have to suffer the loss arising from the exchange of Euros back to Lm. Thus in reality before the banks start accepting the EURO at the central parity rate, the local businesses that have never dealt in foreign currencies will all of a sudden find themselves exposed to currency risk. In its bid to try to eliminate this problem, the NECC through its guidelines states that the retailer should charge an administration fee in respect of payment in EURO, in order to make up for the bank charges.
However I think that such a mechanism would do more harm than good. What would be the reaction of tourists when they would be charged a price higher than how the products are priced on the shelves?
So should we use dual pricing a year or six months before adopting the EURO? Introducing dual pricing before the fixed rate of exchange is known, could be counterproductive for the general public and incurs unnecessary costs for the business community. Thus the best time to start using dual pricing is when the rate of exchange has been fixed, and the banks would lift their charges.
As the European Commissioner for Economic and Monetary Affairs, Joaquin Almunia said the final and irrevocable exchange rate between the Maltese currency and the Euro will be established at the end of June or the beginning of July, 2007.

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