Woolworths weathers regulatory and political storm

Woolworths has posted higher profit margins for its supermarkets, which could only serve to anger politicians and regulators.

Woolworths Group chief Brad Banducci with the woman who will replace him in the job, Amanda Bardwell.

Shares in Woolworths were sold down for a second day as the market reacted to the shock departure of chief executive Brad Banducci as well as fears the supermarket chain isn’t well positioned to cope with the fast-changing political and regulatory landscape now threatening the sector.

Woolworths on Wednesday posted interim results that showed a concerning slowdown in sales for its flagship supermarkets arm, although profit margins at the stores were fatter, with analysts now fretting over stronger headwinds for both Woolworths and Coles into 2024.

Coles will release its interim results on Tuesday and investors will be interested to see if it is also witnessing slowing food and grocery sales as well as its positioning itself for a political onslaught from a looming Senate inquiry into the sector. A review by the ACCC and some community backlash over perceptions of price gouging by the major supermarket chains are also weighing on the sector.

For the moment the Albanese government is unlikely to use the heavy regulatory stick of actually breaking up the supermarket giants Woolworths and Coles.

On Thursday Prime Minister Anthony Albanese said splitting up the supermarket oligopoly in Australia would be a very big call.

Following heated debate on Thursday, Mr Albanese refused to answer questions on whether he was “up for the task” and “had the power” to force a break-up.

“We have a private sector economy in Australia and not a command and control economy, we’re not the old Soviet Union.”

Woolworths shares fell as much as 6.6 per cent when it issued its half-year results on Wednesday, reporting a loss of $781m (driven by $1.7bn in writedowns) against a profit last year of $845m, and which also revealed sales at its Woolworths stores in Australia had slowed.

Also troubling investors was the announcement that Mr Banducci would retire in September, handing over to Woolworths loyalty and e-commerce chief Amanda Bardwell, after a torrid few months for Mr Banducci linked to missteps around Australia Day and a trainwreck interview on the ABC’s Four Corners program.

Woolworths shares fell another 1.79 per cent to $32.90 on Thursday and the stock is down 10 per cent in the last month.

“Woolworths is facing a challenging outlook,” said JP Morgan analyst Bryan Raymond. “Risk remains to the downside in Australian food (supermarkets) in our view, due to the business not being appropriately positioned for the political and regulatory climate it currently faces.”

And the rise in food and grocery margins for the supermarket over the half to 6.1 per cent may actually see it punished by regulators and politicians.

“In our view, delivering 96 basis points of first half gross margin expansion in the midst of an ACCC review risks inflaming regulators, politicians and the media, which have the ability to drive structural change (even if unlikely) but are certainly entrenching a negative price perception towards the grocery industry,” Mr Raymond said.

He said the market was discounting the Woolies current level of earnings.

In a note to clients Macquarie said with the supermarket inquiry spotlight on high gross profit, industry concentration and perceived power, margin expansion would likely be difficult in this environment. This came as costs within the business rose.

“Cost inflation across wages, energy, and logistics remain elevated. We forecast for EBIT margins in the food business to decline around 30 basis points over the next 4 years to 5.8 per cent.”