ACCC fired up for epic battle with Coles and Woolworths over misleading discounts

The competition regulator is pursuing Coles and Woolworths over misleading discounts, with the ACCC chief saying the issue is as important as the so-called Qantas ghost flights case.

Woolworths CEO Amanda Bardwell, left and Coles chief executive Leah Weckert.

Coles has vowed to defend a blockbuster “misleading” discount price lawsuit against it and fellow major Woolworths by the competition regulator, which has labelled the case one of its most critical ever launched.

Australian Competition and Consumer Commission chair Gina Cass-Gottlieb told The Australian the court action launched on Monday was as important as the so-called Qantas ghost flights case, in which it accused the airline of selling tickets for journeys that had been cancelled.

Australian Competition and Consumer Commission chair Gina Cass-Gottlieb. Picture: Jane Dempster

In many instances, the regulator will allege decisions to discount a product were taken before shelf prices were raised, for the express purpose of establishing a higher comparative price.

“I would say that it is critical – in this time, and given the significance – that it is a critical and pivotal case,” Ms Cass-Gottlieb said of the suit, which threatens to expose tightly held commercial data around the discounting practices which are an essential competitive tool in the fight for market share.

“(The case) relates to really essential services, food and grocery products for hundreds of popular supermarket products across periods of 20 months for Woolworths and 15 months for Coles.

“It’s important because of the nature of the products in a cost-of-living pressure period.

“We say it’s important that pricing claims are accurate. (But) it’s more important when consumers are seeking to manage budgets closely and that consumers need to be able to trust in the accuracy of a discount claim.”

Investors discounted the supermarket majors’ sharemarket value on Monday on the prospect of a hefty penalty or court settlement.

Coles shares fell 3.3 per cent to $18.59, while Woolworths ended 3.4 per cent lower at $33.79, wiping a combined $2.3bn from their market value.

But Coles defended its price campaign, telling the Australian Securities Exchange the sticker hikes were a result of its own cost pressures.

“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.”

Woolworths CEO Amanda Bardwell told the market it would review the ACCC’s case. “Our Prices Dropped program was introduced to provide our customers with great everyday value on their favourite products,” she said.

While promotions on popular items is a critical strategy to attract shoppers and market share, decision-making about which supermarket items are discounted is opaque and often suppliers help to pay for the discount by taking a cut. Up to one-third of shelf stock may be placed under discount at a time.

The ACCC’s move to sue the country’s two biggest supermarket retailers will heap further pressure on Coles and Woolworths, who are staring down calls they should be broken up as they face the challenges of operating amid a significant inflationary environment.

Coles and Woolworths executives have also been hauled before a senate inquiry into price gouging and their businesses are facing a separate inquiry – which is also being conducted by the ACCC – into pricing practices.

Coles CEO Leah Weckert assumed her position in May last year from Steven Cain, while Woolworths chief Amanda Bardwell took up the post from an under-fire Brad Banducci on September 2.

It means both executives have inherited the consequences of the alleged conduct carried out under the watch of their predecessors.

On Monday, the competition watchdog alleged both retail chains promoted “misleading” discounts on hundreds of common supermarket products including biscuits, batteries and dishwashing liquid.

It said the supermarkets offered some products at a regular price for at least 180 days. They then hiked the price of the product by at least 15 per cent for a relatively short period of time, before they lowered it on to the Woolworths Prices Dropped promotion or Coles Down Down program.

The ACCC alleged the display of the Prices Dropped and Down Down tickets was misleading because the price of the products was in fact higher than or the same as the regular price at which the supermarket had previously offered.

The ACCC claimed 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.

E&P retail analyst Phillip Kimber said the period in question – being the 2022 and 2023 financial years – had a material step up in the number of supplier price requests.

“At the time both (Woolworths) and (Coles) commented that the number of price requests from suppliers was four times or more than the typical run-rate of supplier price requests,” he said.

“We note the two examples provided by the ACCC both involved a situation where the suppliers requested a price increase.

“Subsequent to this request, the retail shelf price was raised, and then shortly after (Woolworths) or (Coles) put the specific product on to a Prices Dropped or Down Down promotion where they referenced the discount to the new price.”

A Prices Dropped promotion sign at a Woolworths supermarket. Picture: Getty Images

Mr Kimber said it was common to see an increase in promotional activity on a product immediately after a price rise given “price elasticity”.

“This is often effectively funded by the supplier to ensure an acceptable level of volumes is maintained post a price rise (ie. given manufacturing efficiencies back up the supply chain),” he said. “The case will no doubt explore the appropriate length of time between a price rise (on shelf) and the retailer being able to refer to this as the ‘new’ price”.

Mr Kimber said the “inherent risk” was that with so many price rises and products on promotion at a major supermarket chain, “there is always the potential that an issue could have occurred that is deemed to be ‘false and misleading’ ”.

But Ms Cass-Gottlieb told The Australian while those price changes are not regulated, so the ACCC has based its case on a “reasonable” amount of time.

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

“We say that for them (the products) to come under a sustained reduction in regular prices of supermarket products program, you need to be able to compare to a relatively sustained period of time, as distinct from a short, temporary price spike.”

Ms Cass-Gottlieb said Coles and Woolworths control their retail pricing and negotiate with suppliers in relation to promotions too.

Coles’ Down Down promotion signage.

“We don’t think this is an inherent risk that they can’t manage, in fact that they’re free to set their price but they have to be accurate in their price representations,” she said.

“It’s very important to note that we allege in many cases, they had planned to later place the products on a Prices Dropped or Down Down promotion before the price spike, and implemented the temporary price spike for the purpose of establishing a higher ‘was’ price. So they were controlling the pricing. They were also controlling the time period in which there was a temporary price spike. There was some very careful planning and consideration here.”

Australian Bureau of Statistics figures show consumer price inflation shot up from an annual rate of negative 0.3 per cent in the June quarter of 2020, to 7.8 per cent in the December quarter of 2022. It is currently at 3.8 per cent.

Price inflation for manufactured food and non-alcoholic beverages reached 7.5 per cent in the year to June 2023. As well, grocery bills for the average Australian household reached $728 per month by the middle of 2024, up 10 per cent from 2022, according to research by financial comparison site Canstar.

In May, Roy Morgan reported consumer trust in Coles and Woolworths had plummeted.

Coles dropped 221 places from its December 2023 ranking as Australia’s fifth most trusted brand to become the country’s ninth most distrusted brand.

And Woolworths dropped 32 places from its December 2023 ranking as Australia’s second most trusted brand to 34th.

Coles recently posted an annual $1.1bn profit (up 10 per cent), making 2.56 cents for every dollar a customer spends.

Woolworths, which makes 2.5 cents off every dollar spent, announced an initial net profit of $1.7bn, down 0.6 per cent from the year before.

The supermarkets groups’ annual results, posted in September, revealed rising supply chain costs were weighing on operating margins.

Coles was better able to combat the squeeze with a sharp focus on cost savings and reduction on theft in stores.

“Pricing is as competitive as it has ever been, and competition remains tough,” Morgan Stanley Australia analyst Melinda Baxter said of the results.

Originally published as ACCC fired up for epic battle with Coles and Woolworths over misleading discounts