Investors snap up Woolworths, Coles shares after supermarkets avoid ACCC divestiture

Woolworths and Coles shares on Friday had their strongest one-day gains since March 2020 in the wake of news the ACCC supermarkets report had no ‘profit killing’ recommendation.

Coles and Woolworths have strongly defended their profitability and grocery pricing in the wake of the ACCC supermarkets report. Picture: Dan Peled

Woolworths and Coles have coolly welcomed the competition regulator’s final report into ­supermarkets, but were quick to remind regulators and the government that their profits were modest and not out of step with global peers, while extra red tape could ratchet up grocery prices.

Following a year of investigations conducted by the Australian Competition & Consumer Commission, as well as eight other reviews and inquiries into the $120bn grocery industry, the twin supermarket giants on Friday extolled the high competition within the sector and their focus on lowering prices at the checkout for shoppers.

And while they have welcomed any recommendations from the ACCC to improve transparency for customers and suppliers, with much of the regu­lator’s 20 recommendations in its report focused on this issue, they also raised concerns that being wrapped up in more red tape and regulations would drive up business costs, hinting that this might be passed on to consumers.

“Coles welcomes any recommendations that improve transparency for suppliers and cus­tomers but cautions against measures that will increase red tape and drive up costs. We will review all of the recommendations in detail,” Coles said in a statement.

Woolworths chief executive Amanda Bardwell said: “We welcome recommendations that ­improve transparency for customers where they don’t have ­unintended consequences or increase costs.”

However, following the release of the ACCC final report on Thursday, it was revealed that Woolworths and Coles had dodged the worst fears of many shareholders and analysts that the regulator would recommend for the regulation of grocery pricing or the ways that promotions were conducted. There was also a sigh of relief in the boardrooms of Woolworths and Coles, as well as among investors, that the ACCC would not seek divestiture powers to break up their businesses and force them to sell off parts of their sprawling retail empires.

Woolworths chief Amanda Bardwell and Coles’ Leah Weckert.

The removal of any of these kinds of punitive regulations, as well as the lightness of the 20 recommendations put forward by the ACCC report, resulted in a relief rally in the supermarkets’ share prices, with Woolworths and Coles having their strongest one-day rally since March 2020. Shares in Woolworths leapt more than 6 per cent, while Coles lifted just over 5 per cent. Shares in supermarket wholesaler Metcash also rose, gaining 3.6 per cent.

“While we do see heightened media publicity around the announcement as likely to negatively impact the supermarkets in the near term, we do not expect a material impact to supermarket earnings from the recommendations,” Citi analyst Adrian Lemme said.

However, he said there could be a small impact to margins on fresh food in the wake of a ­recommendation around the treatment of fresh produce farmers and transparency around buying contracts.

“There are a range of recommendations regarding improving the operation of the fresh market,” Mr Lemme said. “Most notable to us is recommendation 15, which states that Aldi, Coles and Woolworths should not be able to unilaterally reduce wholesale fresh produce prices or volumes agreed with suppliers in their weekly tendering processes. This reduction in flexibility could impact fresh margins.”

Most of the recommendations – yet to be agreed by the federal government – relate to price transparency, better communication of when the package size of a grocery item is reduced, better displays of price changes and handing more negotiating power to suppliers in terms of contracts.

While the ACCC report did not find any evidence of profit gouging, it did claim that Woolworths and Coles operated an oligopoly and had among the highest profits in the world among global supermarket peers.

Both supermarket giants denied that their profits were world-beating, and said they had worked hard to keep grocery ­prices as low as possible amid rising inflation for suppliers and within their own business.

“While of no comfort to households and families, the ACCC’s own analysis shows grocery price inflation in Australia has been lower than in countries like Canada, the UK, the US and New Zealand,” Coles said.

“Our net profit margin has also not changed. Coles net profit after tax (NPAT) – the only true measure of a company’s profits – has remained at around 2.6 per cent as a percentage of sales throughout the last five years, including through Covid-19 and the height of inflation. This means we earn around $2.60 for every $100 a customer spends in our stores – less than 3c in the dollar. Coles NPAT margins are comparable to global peers including countries like Canada, the United States and United Kingdom.”

Coles said overall product margins had increased nominally to cover rising costs, but the ACCC’s analysis of these margins excluded the other significant costs such as energy, rent, and wages, which have all increased.

Both also argued that the $120bn grocery sector was highly competitive and that consumers had a strong range of choices.

“Our experience, in store and online, is that the Australian grocery sector is very competitive,” Ms Bardwell said.

“Our customers have greater choice than ever before and are cross shopping between different retailers more often. If we don’t get it right for our customers, they shop elsewhere.”

Both Woolworths and Coles said they would review the 441-page ACCC report and its recommendations.

Woolworths shares closed up 6.3 per cent at $29.93. Coles closed up 4.85 per cent at $19.46

Originally published as Investors snap up Woolworths, Coles shares after supermarkets avoid ACCC divestiture