Both Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) shares have been in the headlines recently, and not for the best reasons.
A cost of living crunch is always going to focus attention on Woolies and Coles, given their collective role in providing the majority of Australians' supermarket needs.
But this attention has now snowballed into some potentially worrying developments for Coles and Woolworths investors. After all, lower supermarket prices may be good news for customers, but not so much for shareholders.
Last month, we covered how some federal parliamentarians have been calling for an enquiry into the pricing power of Coles and Woolworths.
At the time, we quoted Greens Senator Nick McKim, who said: "For too long the big supermarkets have had too much market power. This allows them to dictate prices and terms that are hitting people hard… We'll find a way to dismantle their power and bring grocery prices down".
Then, earlier this month, we found out that the federal government has commissioned a review into the Food and Grocery Code of Conduct, led by former minister Dr Craig Emerson.
On the surface, this doesn't look like good news for Coles and Woolworths and their shareholders either. This is what Prime Minister Anthony Albanese said at the time:
At a time when people are doing it tough, the big supermarket chains have been making record profits – and we know that there's something out of sync there… My government is prepared to take whatever action is necessary.
Doesn't exactly sound good for the supermarkets.
Is this review bad news for Woolies and Coles shares?
However, perhaps shareholders shouldn't be too worried. According to a recent report in the Australian Financial Review (AFR), a former head of the Australian Competition and Consumer Commission (ACCC) has stated that this review is unlikely to yield any meaningful changes in the sector.
Former ACCC boss Graeme Samuel told the AFR that the code of conduct was working to improve relationships between retailers and suppliers, as well as fostering a "culture of fair dealings" at Coles and Woolies.
Further, he stated that competition (which puts downward pressure on prices) is increasing in the sector, with Aldi, Costco and IGA (owned by Metcash Limited (ASX: MTS)) gaining market share.
Here's some more of what he said:
A lot of this could be resolved by looking at the annual accounts. The simplest thing to do is to look at profit margins, and are they reasonable or not?… Compared with overseas, Australia is more competitive, lower profit margin, and pricing.
I'm not sure that the review will [reduce prices]. … I think the public spotlight on the retailers is going to be more important than anything else. One of the greatest disciplines you can impose is transparency.
So perhaps Coles and Woolworths shareholders don't have too much to fear when it comes to this review. But let's wait until the review is complete (it's due by 30 June) to reserve final judgment.
