Aldi, Metcash poised to reap benefits of Coles, Woolworths fallout

Second-tier supermarkets such as Aldi are poised to benefit from souring customer sentiment towards Coles and Woolworths, analysts say.

Second-tier supermarkets such as Aldi are poised to benefit from souring customer sentiment towards Coles and Woolworths, analysts say, after the competition regulator launched a lawsuit alleging fake discounting by the pair.

Jarden retail analysts on Tuesday warned of a potentially prolonged legal battle for the supermarket majors, as they argued over “what is a reasonable period between raising and cutting prices, for which there is no law”.

In the near term, that court process was “likely to benefit Aldi, Metcash and other players in the grocery sector not facing negative press and brand damage,” the analysts, led by Ben Gilbert, said.

But an out-of-court settlement was also seen as “reasonably” likely.

Goldman Sachs analysts argued a price hike on hundreds of household items at Coles and Woolworths during the pandemic was driven by significant inflation, challenging the competition regulator’s claims that the supermarket giants misled consumers with allegedly fake discounts.

Goldman Sachs analyst Lisa Deng sided with the Coles view that supermarket price hikes in 2022 and 2023 were necessary, after the Australian Competition & Consumer Commission launched a Federal Court case against two of the country’s biggest retailers.

“We believe that supermarket price increases in calendar years 2022 and 2023 were driven by significant underlying cost inflation,” she said.

“Both (Woolworths) and (Coles) have noted that there are no clear price establishment policies outlined by the ACCC to date.”

Ms Deng said cost and price inflation had moderated in the third quarter of 2024 for Woolworths, when the company’s disclosed inflation was -0.02 per cent and -0.06 per cent, respectively, and the typical weekly food trolley in June this year was cheaper by 1 per cent, year on year, according to its annual ­results.

The ACCC alleges that Coles and Woolworths misled consumers by selling some products at a regular price for at least 180 days, then hiking the price of the product by at least 15 per cent for a relatively short period and then lowering by a small amount and claiming a discount as part of Woolworths’ Prices Dropped promotion or Coles’ Down Down program.

The “fake discount” case is causing concerns for some investors, with Woolworths shares down 2.9 per cent to $32.80 on Tuesday, after a 3.4 per cent slump on Monday. Coles dived another 3.01 per cent to $18.03, on the back of a 3.3 per cent fall the previous day. More than $4bn has been wiped from their combined market values in two days. “We see risk from negative consumer sentiment towards the major supermarkets from the announcement, which may negatively impact sales,” Ms Deng said.

Mr Gilbert added: “Potential fines could be substantial, with a maximum penalty for each breach the maximum of $50m or reasonably attributable benefit (or if not determined, 30 per cent of adjusted turnover),” he said.

On Monday, Coles – whose CEO is Leah Weckert – released a statement to the market declaring its intention to defend the court case. “The allegations relate to a period of significant cost inflation when Coles was receiving a large number of cost price increases from our suppliers and, in addition, Coles’ own costs were rising, which led to an increase in the retail price of many products,” the company said.

“The Down Down program is one type of promotional campaign involving a longer-term reduction in the retail price of a product, and has been important in delivering lower prices to our customers and driving volume for our suppliers for many years.

“Coles intends to defend the proceedings.”

However, ACCC chair Gina Cass-Gottlieb alleged Woolworths and Coles planned the temporary price spikes in advance to establish a new higher ticketed “was” price, as compared to the “now” discount promoted price “in many cases”.

“The ‘was’ price needs to have been operating for a reasonable period of time to establish it as a genuine price,” she said.

“The ‘Prices Dropped’ and ‘Down Down’ promotions had been promoted for years by Coles and Woolworths in order to lead consumers to understand that those … promotions relate to a sustained reduction in the regular prices of supermarket ­products.

“We acknowledge in the media release there is evidence of cost price increases. The important point is the price representation that is made needs to be accurate and genuine.”

The ACCC has alleged Woolworths applied the “misleading” promotion to 266 products between September 2021 and May 2023. It alleged Coles falsely discounted 245 products between February 2022 and May 2023.