Woolworths and Coles shares could rally after release of ACCC report

The release of the ACCC’s report into the supermarkets could present a buying opportunity for the big retailers’ shares, Macquarie believes.

Australian Competition and Consumer Commission chair Gina Cass-Gottleib has handed her final supermarkets report to the government. Picture: Jane Dempster

The sharemarket adage, “sell the rumour, buy the fact”, could be validated for leading retailers Woolworths and Coles when the competition regulator’s final report on the $120bn supermarket sector is released.

Investors can put their worst fears behind them, according to broker Macquarie.

The imminent release of the Australian Competition & Consumer Commission’s report into the supermarkets could present a buying opportunity, with history showing similar inquiries and interventions concerning Qantas or the banks led to an average 17 per cent share price gain, new research found.

Federal Treasurer Jim Chalmers is currently sitting on the ACCC final report into the supermarkets and is expected to release it as soon as next week, possibly timing the release for political gain before the federal budget and the start of an election campaign.

This has raised fears the ACCC will recommend – and the government will strongly support – a series of harsh measures for the supermarkets, ranging from forced divestments to costly new regulations on promotions and their relationships and contracts with suppliers.

Just last week at The Australian’s Global Food Forum, Coles chief executive Leah Weckert said the supermarket was competing in a “very vigorous” playing field, calling attention to the competitiveness of the $120bn sector as she braced for the release of the report.

One of the worst-case scenar­ios is a crackdown on promotions and loyalty programs, which Macquarie believes could affect earnings for both Woolworths and Coles.

The supermarkets are also currently embroiled in a court case with the ACCC, which has accused them of using false or illusory discounts on groceries to attract shoppers. That court case will play out later this year.

Despite the difficulties, Macquarie believes the supermarkets could bounce back. “Our analysis of share price performance around three major consumer-facing regulatory inquiries into the banks, Qantas and childcare suggests the market tends to ‘sell the rumour’ and ‘buy the fact’,” the Macquarie report said. “100 days prior to the final reports being released, these groups on average delivered a -1 per cent return. However, upon conclusion or release of the final report, there is a significant turnaround in performance. On average, these groups generated a 17 per cent return following respective events.”

The Macquarie analysis reveals that for the last 90 days the supermarkets have generated a negative 3 per cent return. “For the supermarkets, we see this as an opportunity for a rerating.”

Woolworths CEO Amanda Bardwell, ACCC chair Gina Cass-Gottlieb and Coles CEO Leah Weckert. Digital image.

Macquarie said Woolworths, was currently trading at close to a five-year low relative valuation versus Coles. Shares in Woolworths have fallen 20 per cent in the past six months, driven lower by fears of the looming regulatory crackdown but also its disappointing half-year result released in February and the general fall in the equity markets this year. Coles, which reported a strong half-year result that beat analyst expectations and trounced Woolworths, has only fallen 3.36 per cent in the last six months.

However, there are still real risks to the supermarket’s profit base that could flow from the ACCC’s report.

Macquarie has previously noted that it saw the greatest risk to the supermarkets’ profitability via significant controls in promotions and loyalty.

“In our worst-case scenario analysis, we estimated controls around these two items may present 14 per cent of downside to annualised pre-tax earnings to Coles and 20 per cent to Woolworths,” Macquarie said.

“This is largely due to our expectation that Woolworths has a more advanced retail media business – that is more to lose on limitations around loyalty.”

The investment bank estimates that there could be a $3bn to $4bn impact from control of promotions.

“We estimate promotions are on average around 24 per cent of total sales within a typical supermarket, which corresponds to 32 per cent to 33 per cent of packaged goods. We estimate promotions drive a $3bn uplift in sales for Coles and $3.9bn for Woolworths in fiscal 2024,” Macquarie said.

Originally published as Woolworths and Coles shares could rally after release of ACCC report