Time’s up for Woolworths and Coles

In light of the competition issues surrounding Australia’s grocery retail giants in recent years, Woolworths  (ASX: WOW) is set to meet with the Australian Food and Grocery Council (AFGC) on Monday to agree to a voluntary supermarket code of conduct.

As the dominance of Woolworths and its rival Coles, owned by Wesfarmers  (ASX: WES), has continued to grow, relations with suppliers have been strained, and the two companies have forced prices to unsustainably low levels. Take, for example, the two groups selling milk for around the $1 mark per litre over the last year – an amount that both companies wanted to decrease further.

Furthermore, it is believed that the grocery powerhouses have been using non-public information about their suppliers’ pricing strategies, costs and margins to assist in the development of their own private-labeled brands as direct competition. According to The Sydney Morning Herald, private label products represented around 25% of total sales in 2010, but it is believed that number could grow to around 50% in years to come.

As such, the two groups have been in discussions with the AFGC for months to reach an agreement on a voluntary code which is designed to improve relations with suppliers.

Smaller grocery retailers such as Aldi and Metcash’s (ASX: MTS) IGA stores have also been heavily impacted by the dominance of Coles and Woolworths, who control a combined 70% of the grocery shelf space in Australia. As a result, there has been speculation that if a voluntary code isn’t reached by the parties within the next few weeks, a mandatory code could be imposed on them instead under the Competition and Consumer Act. This would give suppliers private rights to take action against breaches of contracts, and would give the Australian Competition and Consumer Commission (ACCC) powers to enforce the code, including the power to seek injunctions.

Foolish takeaway

For years, Woolworths and Coles have been allowed to aggressively compete with one another for market share by heavily discounting prices and offering unbeatable promotions – activities that are being viewed as anticompetitive behavior due to the disastrous impact on suppliers and other competitors. Whether Woolworths and Coles opt for the voluntary code of conduct or one is prescribed for them, the time has come where we should see significant changes in the marketplace.

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