On Monday, Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) shares came under significant pressure. Both supermarket giants ended the session over 3% lower.
The catalyst for this was news that the Australian Competition and Consumer Commission (ACCC) is taking them both to court over alleged misleading Prices Dropped and Down Down claims.
The ACCC's Chair, Gina Cass-Gottlieb, explained why the competition regulator was taking action. She said:
Following many years of marketing campaigns by Woolworths and Coles, Australian consumers have come to understand that the 'Prices Dropped' and 'Down Down' promotions relate to a sustained reduction in the regular prices of supermarket products. However, in the case of these products, we allege the new 'Prices Dropped' and 'Down Down' promotional prices were actually higher than, or the same as, the previous regular price.
We allege that each of Woolworths and Coles breached the Australian Consumer Law by making misleading claims about discounts, when the discounts were, in fact, illusory. We also allege that in many cases both Woolworths and Coles had already planned to later place the products on a 'Prices Dropped' or 'Down Down' promotion before the price spike, and implemented the temporary price spike for the purpose of establishing a higher 'was' price.
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Broker reaction
Goldman Sachs has been looking into the matter. It believes inflationary pressures are to blame and highlights that no clear price establishment policies are in place by the ACCC. The broker said:
We believe that supermarket price increases in CY22/23 were driven by significant underlying cost inflation. In CY24, cost and price inflation has moderated: in 3Q/4Q24 for WOW, the company's disclosed price inflation was -0.2% and -0.6%, respectively, and that its typical weekly food trolley in June 2024 is 1% cheaper YoY, per its FY24 results.
Both WOW and COL have noted that there are no clear price establishment policies outlined by the ACCC to date. As a result, we understand that both companies have their own respective company policies on price establishment.
However, the broker is concerned that consumer sentiment could be hit and weigh on sales. It said:
We see risk from negative consumer sentiment towards the major supermarkets from the announcement, which may negatively impact sale. Given both COL and WOW has been named, it is too early to tell potential market share impact.
Goldman also point out that there are some hefty penalties that could be imposed on Coles and Woolworths should they be found guilty. The broker adds:
We do not take a view on any outcome of the development, and think it is too early to assess any potential penalties. We note that the maximum penalty for breach of Australian Consumer Law is AU$50mn per breach.
For the time being, Goldman has retained its neutral rating and $18.00 price target on Coles shares and its buy rating and $40.10 price target on Woolworths shares.
