Any superannuation fund who read Woolworths’ submission earlier this year to the Australian Competition and Consumer Commission’s (ACCC) supermarket inquiry might have wondered whether it was time to head for the exit doors.
Woolworths lamented that it faced “robust competition (both in store and online)” from “many different types of grocery retailers in Australia competing fiercely for share of the customer’s grocery basket”.
The retailer’s submission documented – and even seemed to admire – the significant investment and innovation of its competitors in the sector.
“Three of the world’s largest retailers – Aldi, Amazon Retail and Costco – have established material positions in Australia with significant published plans for growth. Each offers compelling and differentiated value propositions that heighten competitive tension and the need for dynamic innovation in grocery retail,” Woolworths said.
The submission even seemed to suggest investors looking for ASX companies with better margins in the broader retail sectors should be considering stocks like Premier Investments, Harvey Norman or Super Retail Group.
Against all odds
However, it seems that against all odds the country’s largest supermarket chain somehow manages to survive. Woolworths’ latest annual results showed it lifted sales to $67.9 billion and achieved a net profit after tax of $1.7 billion.
The ACCC’s Supermarket Inquiry: Interim report released late last month noted Woolworths and Coles account for approximately 67 per cent of national supermarket retail sales (see Figure 1.1), a combined share that has gradually crept up over the years.
“We see Woolworths and Coles providing a broadly similar experience to customers through largely undifferentiated product ranges, pricing at similar levels and similar non-price offerings including loyalty program,” the ACCC said.
The regulator is now trying to ascertain to what degree this scenario has been the secret to their success. What may also be part of the secret is allegedly misleading customers.
ACCC cracks ‘down down’
The ACCC has commenced separate Federal Court proceedings against Woolworths and Coles for allegedly breaching the Australian Consumer Law by misleading consumers through “illusory” discount pricing claims on hundreds of common supermarket products.
“Following many years of marketing campaigns by Woolworths and Coles, Australian consumers have come to understand that the ‘Prices Dropped’ and ‘Down Down’ promotions relate to a sustained reduction in the regular prices of supermarket products.
“However, in the case of these products, we allege the new ‘Prices Dropped’ and ‘Down Down’ promotional prices were actually higher than, or the same as, the previous regular price,” according to ACCC Chair Gina Cass-Gottlieb.
Australian Prime Minister Anthony Albanese is also unimpressed. Announcing $30 million in extra funding for the ACCC to “crackdown on dodgy supermarket practices”, he said, “we don’t want to see ordinary Australians, families and pensioners being taken for a ride by the supermarkets”.
Overbaked Oreos
The ACCC alleges the conduct involved 266 products for Woolworths at different times across 20 months, and 245 products for Coles at different times across 15 months.
Woolworths and Oreos probably best to demonstrate “illusory” discounts that the ACCC alleges were on offer.
From at least 1 January 2021 until 27 November 2022, Woolworths offered the Oreo Family Pack Original 370g product for sale at a regular price of $3.50 on a pre-existing ‘Prices Dropped’ promotion for at least 696 days.
On 28 November 2022, the price was increased to $5.00 for a period of 22 days. On 20 December 2022, the product was placed on a ‘Prices Dropped’ promotion with the tickets showing a ‘Prices Dropped’ price of $4.50 and a ‘was’ price of $5.00. The ‘Prices Dropped’ price of $4.50 was in fact 29 per cent higher than the product’s previous regular price of $3.50.
In this example, Woolworths had decided (after a request from the supplier for a price increase) mid-November 2022 to take the product off ‘Prices Dropped’, increase the price, and then put it back on to ‘Prices Dropped’ three weeks later.
In its submission to the ACCC inquiry earlier this year Coles said on the subject of when a discount claim might be regarded as non-genuine and therefore misleading, retailers needed “more detailed guidance in this area”.
Coles said “at present, grocery retailers formulate their own internal compliance guardrails regarding how often products can be promoted and how long the higher shelf price must be established before the price can drop and a discount be claimed”.
Shrinkflation
Woolworths’ April 2024 submission also made the claim that when it came to food prices “the competitiveness of Australia’s retail grocery sector has certainly played a role in restraining inflation from the levels seen overseas”.
However it seems the opposite might often be the case due to “shrinkflation”.
A CHOICE investigation earlier this year revealed a number of supermarket items that had been affected by ‘shrinkflation’, including cereal products.
Coles homebrand Mighty Grain, which was being sold in 560g packages in October 2022, was later being sold in 495g packages at the same price of $4.50. Woolworths’ equivalent home brand Max Charge cereal was also being sold in 560g packages until September last year, when the retailer started offering it in 495g portions while maintaining the same $4.50 price.
CHOICE said this meant the consumer was now effectively paying 14 per cent more for both versions of this cereal.
Where grocery items become smaller in size without a commensurate reduction in price the Australian Bureau of Statistics (ABS) takes this into account when calculating inflation.
CHOICE said this means “not only are consumers getting less value for their groceries, the phenomenon of shrinkflation is also contributing to cost of living pressures”.
Herding
So how should the super funds who are invested in Woolworths and Coles be responding to all this?
The Reserve Bank of Australia’s (RBA) recently-expressed concerns about super funds “herding around common benchmarks” was also a reminder of the challenges facing asset owners and managers who claim to be ESG advocates.
The RBA’s latest Financial Stability Review noted the “decrease in diversity of behaviour and strategy” of super funds, who own over one-quarter of equity issued by domestic banks, including the Big Four that account for a big chunk of the ASX’s market capitalisation.
In other words, super funds are under pressure to track common benchmarks and therefore may feel obliged to buy more shares in, say, an ASX Top 20 company when its share price rallies, and to lighten its holding if/when it share price falls.
This does not leave much room for super funds to express their displeasure at an ASX Top 20 company by divestment.
Woolworths and Coles are weathering a raft of inquiries into the supermarket and grocery sector that are questioning and criticising their behaviours. There are also calls for legislated powers to force the divestiture of supermarkets where abuse of market power may be occurring.
So when it comes to investee engagement, having a few super funds suggesting to them they should be better corporate citizens may not be much of an additional burden for Woolworths or Coles.
Elephant in the aisle
It seems engagement by asset owners with Woolworths and Coles may not be adequately addressing the elephant in the aisle – i.e. the major retailers’ treatment of millions of its customers.
For example, the Australian Council of Superannuation Investors’ (ACSI) 2023-2024 Stewardship Report notes “it has had ongoing engagement with supermarkets about responsible packaging and waste, and more recently about the progress of the Soft Plastics Taskforce created due to the collapse of the REDcycle soft plastics scheme”.
ACSI says “Positively, in February, the Soft Plastics Taskforce announced the restart of limited soft plastics collection points on a trial basis in Melbourne. This is small, but welcome progress on an ongoing engagement priority with both retailers”.
(The Taskforce comprising supermarkets ALDI, Coles and Woolworths is one form of retailer collaboration that the ACCC has authorised).
Status quo
Woolworths and Coles (naturally) prefer the status quo – and like to warn about what will happen if things change.
Coles says the “important role in the Australian economy” that it and Woolworths play “should not be underestimated”.
In their submissions both talk about the tax revenue they generate for governments and the big dividends they pay to retail and institutional investors.
Woolworths claims that if it was assumed that it made no profits the average weekly savings on groceries per Woolworths customer would be only about $5 per week – but that this would also see governments denied tax revenue and investors deprived of dividends.
Woolworths says “the majority of our dividends are paid to Australian shareholders who own around 70 per cent of our shares either directly or via their superannuation funds. This contributes directly to the retirement incomes of millions of Australians”.
Of course those Australians who can’t afford to hold a swag of Woolworths and Coles shares and/or have only modest super balances may see things differently.
