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Coles and Woolworths defend against ‘extremist’ attack

The leaders of Woolworths (ASX: WOW) and Wesfarmers (ASX: WES), the owner of Coles, have come out swinging against a proposed bill that would force them to sell up to half their stores in order to reduce market share. The bill is being put forward by independent MP Bob Katter with the stated intent of helping primary producers, but has been slammed by the supermarket’s bosses as promoting an extremist policy of protectionism.

The private members bill was introduced by Mr. Katter last week under the title ‘Reducing Supermarket Dominance’. The bill would set a cap on each of the supermarket group’s market share to a maximum of 20 per cent each, thereby limiting their combined share at 40 per cent. Mr. Katter declared Woolworths and Coles to have a current combined market share of over 80 per cent – which implies that the firms would be required to shrink by half to comply with the proposed law. Industry estimates put the two firm’s current combined market share at closer to 60 per cent – but that would still mean the firms would have to reduce their collective presence by over a third.

The proposed bill comes amid allegations that the pair have used their significant market power to treat suppliers unfairly and demand unsustainably low prices from them. The criticism has led the Australian Competition and Consumer Commission to investigate the practices being used in supplier negotiations.

The leaders of both Coles and Woolworths were unequivocal in their opposition to the proposed bill, with Coles managing director Ian McLeod saying that “this protectionist politics that’s taking place in certain parts of the country is extremist and it’s not going to help Australia one iota”. Mr McLeod also highlighted that the supermarket’s price cuts had meant food costs were one of the few areas where the day-to-day costs that Australians face had not risen over the past 3 years.

Woolworths managing director Tjeerd Jegen likewise responded to the bill by saying that the supermarket’s low price policy was in the best interest of consumers: “Ask our customers – their only concern is job security, helping them with their budget and the future of their children, and I think a strong retail sector can provide jobs, helps customers save money, and will be there for the future”. Mr Jegen also added that it seemed the bill was motivated by Mr Katter’s re-election campaign in the upcoming federal election, saying “Some people would like to be re-elected, and need attention to get into the picture, but I think it’s an ill-conceived idea”.

If the bill were to pass, the impact would be devastating for Woolworth and Coles.  Woolworths would have the most to lose in shrinking to a 20% market share. Its supermarket division generated $26.2 billion in first half sales versus $18.3 billion for Coles. However that differential would be cold comfort to Coles, where the impact would also be severe. Mr McLeod estimated that if the rules were implemented, Coles would have to close 12 stores and lay off 1000 workers in Queensland alone. Depending on which measure of market share is used, the changes could destroy up to half the combined value of the two supermarket chains.

What would begin as punishment for Coles and Woolworths would easily have knock-on effects. The most immediate casualties would be the workers of the shuttered stores and their families. However all firms that rely on the supermarkets would also be affected. Shopping Centres Australasia (ASX: SCP) is a real estate investment trust that owns and operates a portfolio of shopping centres. The large supermarket chains are these shopping centre’s anchor tenants.  They are used to attract customers that come for their regular grocery purchases – and thereby generate foot traffic for the rest of the shopping complex. Losing these core anchor clients would have an immediate impact on the success of the centres, and the sales of all the retailers within them.

Foolish Takeaway

The leaders of both Coles and Woolworths have come out swinging against a bill that would devastate both of their businesses. As the larger of the two, Woolworths would take the biggest hit of the proposed requirement to shrink market share to 20%. However the impact on both businesses would be severe, and would have knock-on effects in other areas of the economy that benefit from the scale of the large supermarket chains. The firms will be thankful that at this stage the move appears to be more about re-election politics than a serious threat. However it adds one more regulatory threat to the list that the two supermarket chains will need to navigate.

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Motley Fool contributor Matt Joass does not own shares in any of the companies mentioned in this article.

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