The Coalition has thrown its support behind the ACCC's decision to keep Woolworths (ASX: WOW) from building a new store in Glenmore Park – a housing estate west of Sydney – because the company already has a store operating in the area.
The ACCC was alerted of the supermarket giant's plan to build a new 3,200-square-metre store in the area. Woolworths had been in negotiations with landowner Stockland (ASX: SGP) for some time regarding the project. After 12 months of deliberation, the watchdog has established that allowing the corporation to proceed with implementing those plans would likely decrease competition in the local region substantially.
As it stands, if Woolworths had been given the green light, it would have operated the only two supermarkets in the area, whilst also owning the closest supermarket in a neighbouring town. Although Aldi is due to open a store in 2014, the ACCC established that three supermarkets owned by different corporations would stimulate competition more effectively than if Woolworths owned two of the three.
The ACCC has been investigating whether the behaviour of Woolworths and Coles – owned by Wesfarmers (ASX: WES) – has been anticompetitive due to the sheer size and dominance of the duo. As they force prices to unsustainably low levels, competitors such as Aldi or IGA, which is owned by Metcash (ASX: MTS), are unable to match those prices. As such, the Coalition has labelled the competition watchdog's decision as "sensible", stating that where the ACCC believes competition laws have been infringed upon, it is right that they act accordingly.
Foolish takeaway
Whilst the decision is an indicator that the dominance of the two major supermarkets will be clamped down upon, competition lawyers anticipate that the decision could be hard to justify in court due to the lack of evidence that the opening of a new store would, in fact, reduce local competition. As such, it looks very likely that Woolworths will challenge the decision, with fears that a precedent could be set regarding the opening of future stores – which would greatly affect the company's plans to open as many as 25 new stores annually.
Despite having pulled back in recent weeks, Woolworths has still given investors a very healthy 20% return over the last 12 months, not including dividend payouts. However, should the company's future growth be threatened, expect investors to start heading for the doors.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
