The Woolworths Group Ltd (ASX: WOW) share price is giving Red Delicious apple vibes today… minus the delicious.
Shares in the retail powerhouse are down 1.4% to $31.80 as a Senate committee spares no punches over supermarket prices.
Departing Woolworths CEO, Brad Banducci, has been the first to face questioning into how the supermarkets determine their prices and whether market share dominance is being exploited at the cost of consumers.
However, the conversation between Banducci and the committee is going anything but smoothly.
Outgoing CEO in the firing line
Much controversy has surrounded Woolworths, Coles Group Ltd (ASX: COL), and other retailing giants as Australians face a cost of living crisis. Today that comes to a head as a Senate committee questions leaders of these companies to unearth any inconsistencies in price-setting practices.
The Woolworths CEO described the Australian grocery landscape as "highly competitive" to kick off the discussion.
In referencing others in the industry, such as Amazon, Aldi, and Bunnings [owned by Wesfarmers Ltd (ASX: WES)], Banducci denies the 'fresh food people' are engaging in any form of price gouging. The CEO noted that the competition present means Woolworths must price competitively.
Another topic making its way into questioning was land banking. This followed accusations by Grant Ramage, Metcash's head of supermarkets, that Woolworths and Coles were engaging in the practice. Yet, Banducci rebutted the Senate, saying that Woolies buys land intending to develop it.
Questioning by Greens senator Nick McKim later became more heated. Return on equity (ROE) was a point of contention between Banducci and McKim. After multiple attempts to extract Woolworths' ROE for the last financial year, McKim said:
You have repeatedly refused to answer the question in front of a Senate inquiry. Why won't you answer the question?
Preferring to cite the company's return on investment (a different measurement), Banducci evaded providing Woolworths' ROE.
After further failed attempts, McKim warned the CEO of being held in contempt — a ruling that could land Banducci behind bars for six months.
Eventually, the Woolworths CEO conceded. Banducci stated he did not know the company's ROE and took the question on notice.
Return on equity the sticking point for Woolworths shares
Senator McKim noted that Australia has the most profitable banking sector of any country.
Drawing a comparison, the senator explained the average ROE for the banks is around 10% in Australia. Meanwhile, Woolworths' return on equity for the last financial year is "more than two and a half times the average of Australia's banks".
How do other listed retailers compare:
- Metcash Ltd (ASX: MTS): 23.3% return on equity
- Coles Group: 31.0% return on equity
- Wesfarmers: 29.8%
It's worth noting that return on equity is a function of net income divided by shareholder equity. Hence, a high ROE isn't always attributable to increased profits; it can also rise from a decrease in equity. Moreover, equity falls when a company's net assets decrease, i.e., more debt or fewer assets.
Woolworths shares are down 15.2% year-to-date.
