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Coles defends half baked idea

Supermarket chain Coles, owned by Wesfarmers (ASX: WES) is defending its “freshly baked” bread in Federal Court.

The ACCC has charged that Coles misled consumers with the claim that its bread is in fact “freshly baked,” “baked today, sold today” and “freshly baked in-store” because the bread is only partially baked or “parbaked” in store (for the crust to rise), after first being partially baked, frozen, and delivered by suppliers.

The practice is common, with Woolworths (ASX: WOW) and other retailers and restaurants understood to do the same. However, Coles became the object of the investigation in part because a small portion of its bakery products are or have been first partially baked overseas before their delivery to Australian stores. (Most Coles stores include baking facilities and the chain employs bakers.)

According to The Australian Financial Review, “Coles has told the Federal Court that consumers should not assume the word ‘baked’ means ‘baked from scratch.’”

But while this particular issue seems to be one about consumers and their perceptions, it’s also part of the fairly intense scrutiny aimed at Australia’s powerful supermarket duopoly, their marketing practices, plans for expansion, and their relationships with suppliers, by regulators.

The takeaway for investors

Over the last five days, Wesfarmers shares have dipped a little more than 1% and Woolworths shares have risen about 1.7%, while the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) has climbed about 2.3% overall. Despite the partially baked controversy, for investors seeking large, stable companies paying healthy fully franked dividends, Wesfarmers and Woolworths are worth keeping on a watch list, especially in the event of a broad market pullback offering cheaper prices.

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Motley Fool contributor Catherine Baab-Muguira does not own shares of any company mentioned here.

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