Woolworths Group Ltd (ASX: WOW) shares have come under pressure this week after the grocery giant found itself in hot water, facing both regulatory scrutiny and legal challenges.
In case you missed it, the Australian Competition and Consumer Commission (ACCC) launched legal action against the ASX consumer staples company this week.
Woolworths shares have been heavily sold and are now trading at $33.04, down more than 6.2% in the past week.
But given Woolworths' strong market position, is this an opportunity for investors to snap up shares? Let's dive in.
Why are Woolworths shares under pressure?
Woolworths shares have taken a hit this week after the ACCC launched proceedings against the company.
The ACCC alleges that Woolworths, along with Coles Group Ltd (ASX: COL), misled consumers with its 'Prices Dropped' campaign.
The commission's filings claim the supermarket discounts were not as substantial as advertised, and in some cases, prices were higher than the regular price before the promotion.
ACCC chair Gina Cass-Gottlieb said the discounts "were in fact illusory" and had breached Australian consumer law.
Meanwhile, the regulator today confirmed it was moving to the next phase of the proceedings.
It noted concerns that Australia's supermarkets had "considerable market power and are engaging in practices which disadvantage both their customers and suppliers."
Supermarket retailing in Australia is an oligopoly, with Woolworths and Coles accounting for 67 per cent of supermarket retail sales nationally. Aldi accounts for 9% and Metcash supplied independent supermarkets 7%.
Meanwhile, ACCC deputy chair Mark Keogh said the inquiry had uncovered a great deal about the Australian supermarket industry.
Keogh said oligopolies – where control of a market such as supermarkets is concentrated in the hands of a few – could "limit incentives to compete vigorously on price".
This regulatory probe has likely weighed on investor sentiment, causing a drop in Woolworths' share price.
What do brokers say?
Despite the legal challenges, some brokers remain bullish on Woolworths' long-term prospects.
Shortly after the update, Goldman Sachs retained its buy rating for Woolworths shares in a client note, setting a price target of $40.10.
The broker believes that while the ACCC case poses some risks, the supermarket's fundamentals remain strong.
It added that the supermarket's price increases were "driven by significant underlying cost inflation".
However, Goldman warned that negative consumer sentiment could impact sales. If shoppers react poorly to the ACCC allegations, it might weigh on Woolworths' market share.
The broker also noted that potential penalties from the ACCC case, if found guilty, could add significant costs to the business.
Meanwhile, Woolworths shares are rated a hold by consensus, according to CommSec.
Foolish takeaway
Woolworths shares are facing challenges on multiple fronts, but brokers argue its fundamentals are in shape. It is too early to tell whether the legal proceedings will impact the business's fundamentals.
Woolworths shares have fallen more than 11% in the past 12 months.
