Woolworths and Coles shares under pressure as regulatory risk heightens

The Senate committee enquiry into supermarket competition has now reported back — arguing that where anti-competitive behaviour is found, major retailers should be forcibly broken up. Further, new rules may be implemented to strengthen regulations and prevent price gouging.

Indeed, the final report notes that ‘a clear majority of inquiry participants advised that divestiture powers would be an important “final step” in competition regulation, to be drawn upon when all else fails.’

The committee has examined how major Australian supermarkets, including Coles and Woolworths, have set prices during the cost-of-living crisis. For context, these two firms control roughly two-thirds of the country’s grocery market share.

Enquiry findings

In addition to these top-level findings, the inquiry made more than a dozen recommendations including plans to make food pricing clearer and simplify grocery promotions.

Committee Chair and Greens Senator Nick McKim noted that the report included ‘serious proposals to tackle the price of food, and the profiteering that has done so much harm to the people of Australia…chief among these is the recommendation that price gouging be made illegal.’

While the major supermarkets have strenuously denied price gouging, it’s worth noting there are in most cases no specific laws preventing it. It’s also worth mentioning the political split; the Greens pushed hard for stronger competition powers and divesture changes, while Labor disagrees with the market break-up recommendations.

The supermarkets have consistently defended their corporate practices, blaming rising grocery prices on cost increases imposed by global food brands and wider inflationary pressure. But the entire sector is also now going through a 12-month probe by the competition regulator into their digital businesses.

And of course, profits at the major supermarkets have remained strong, leaving the question of whether there has been an element of corporate ethical underhandedness — even if no laws have been broken.

Where next for Coles and Woolworths shares?

Over the past few months, the enquiry has shone a light on both grocers, including data from consumer advocacy group Choice, which has accused both Coles and Woolworths of shrinkflation — where product sizes are shrunk while costs either stay the same or rise.

Choice journalist Liam Kennedy argues that ‘supermarkets should be required to be upfront with their customers about products that have decreased in size but not in price, so consumers can make informed decisions.’

Further, Choice also contends that in-app deals are examples of unfair pricing practices and should be banned, as they pressure shoppers to exchange their personal data for the best grocery prices and exclude some consumers from getting them.

The inquiry also heard that smaller grocery companies are being overlooked for new sites, entrenching the market dominance of the pair. Ritchies CEO Fred Harrison argued that ‘we often get thwarted where we’re trying to negotiate for a site. The chain will come along at the last minute, offer more and we lose the site.’

Further, National Farmers Federation council member Jeremy Griffith has warned that some fruit and vegetable growers have not received price increases from the major supermarkets for the past 15 years, and that farmers are being compelled to fund price promotions. He argued that Australia’s food sector should not be held to ‘ransom by a large corporate duopoly.’

In perhaps the fieriest exchange of the enquiry, Woolworths CEO Brad Banducci repeatedly declined to disclose the company’s Return on Equity as part of the inquiry into whether its profits are reasonable — and was warned he may be found in contempt, with a penalty of up to six months’ imprisonment. Coles CEO Leah Weckert disclosed this data, but refused to reveal product profit margins and sales figures, arguing this was too commercially sensitive.

Complicating matters, Mondelez President of Australia, New Zealand and Japan, Darren O’Brien — who is also chair of the Australian Food and Grocery Council — has warned that there is a less obvious cost-of-manufacturing crisis, arguing that ‘while multiple inquiries and political displays may grab short term headlines, they fail to address the fundamental drivers of cost pressures. Profit shaming has become prevalent.’

But for Coles and Woolworths, there is perhaps significant regulatory risk going into the new financial year.

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