Abstract

Wintana Tadesse – Determination of factors used to influence purchasing price: Enhancing profitability and competitive edge in discount retail chains

This study investigates the key determinants of purchasing prices in the retail sector, with a focus on Dollarama, a major Canadian discount retailer. Using Ordinary Least Squares (OLS) regression, the research analyzes the influence of four core operational variables: Gross Margin (GM), Minimum Order Quantity (MOQ), stock levels, and consumer demand—on purchasing price. Initial exploratory analysis using scatter plots indicated a strong positive relationship between GM and purchasing price, a negative relationship with demand, and weaker but noticeable trends for stock levels and MOQ.
Diagnostic checks revealed violations of OLS assumptions related to linearity and constant variance. To address these issues, a logarithmic transformation was applied to both dependent and independent variables. Post-transformation, the model satisfied all key assumptions, enhancing the robustness and interpretability of the regression results. The refined analysis confirmed that GM, MOQ, and stock levels have a positive and statistically significant effect on purchasing prices, while demand shows a negative effect—suggesting that increased demand may be associated with supplier discounts or economies of scale in procurement.
To capture more nuanced relationships, interaction terms (e.g., stockouts × MOQ, GM × demand) were introduced. These revealed that the effects of some variables are conditional on others, indicating that purchasing price is influenced by interdependent operational dynamics. However, the addition of interaction terms also increased multicollinearity, diminishing the individual significance of previously important predictors. Variance Inflation Factor (VIF) analysis is proposed as a next step to evaluate and address this issue.
Furthermore, the study explores potential endogeneity by regressing current purchasing prices on lagged values of the independent variables. The significance of these lagged variables suggests that past operational conditions have a persistent impact on present pricing decisions.
The findings hold practical implications for retail decision-makers. Understanding how GM targets, MOQ requirements, inventory levels, and demand trends influence purchasing prices enables retailers to develop more informed procurement strategies, negotiate better supplier terms, and optimize inventory management. These insights are especially critical for discount retailers where cost control and pricing efficiency directly impact profitability.