Woolworths Group Limited (Woolworths, ASX: WOW) opened its first Australian store on Pitt Street, Sydney in 1924 and its first supermarket in 1960. Today Woolworths employs 201,413 people across Australia and New Zealand and services 25 million customers on average each week.

ACCC Lawsuit
Accusations of price-gouging from individual Parliamentarians, most notably the Greens, as well as consumer advocacy organisations, and some suppliers, have weighed on the Woolworths share price over the past 12 months.

However, it was the lawsuit launched by the Australian Consumer and Competition Commission (ACCC) that attracted the share market’s attention on 23 September 2024. The ACCC have alleged that Woolworths and Coles engaged in deceptive and misleading conduct with respect to prices marketed as being on sale.

The ACCC alleges that between September 2021 and May 2023, both supermarket chains temporarily increased prices on different products before promoting them as having been reduced, when in fact the advertised prices were higher than or the same as the price at which the products were originally offered prior to the temporary price spike.

It is alleged that Woolworths did this on 266 different products over a 20-month period by spiking the price higher before placing the affected product on its promotional campaign so that the product appeared to be discounted.

Supermarkets Inquiry Interim Report
In a separate matter, on 27 September the ACCC released its interim report based on submissions from fresh food suppliers expressing their concern about the price they receive, and the quality assessment and rejection process adopted by major supermarkets, including Woolworths.

Suppliers have referred to their inability to negotiate prices received and have expressed concerns that the quality assessment and rejection process is used for purposes other than genuine quality issues, including to manage volumes received by supermarkets. Suppliers contend that existing trading arrangements place a disproportionate level of risk on suppliers verses supermarkets. Suppliers also raised concerns about being pressured to contribute to the cost of promotions, as well as a lack of transparency when it comes to weekly tenders for the supply of fresh fruit and vegetables.

The ACCC have not yet reached any conclusions about the concerns expressed by suppliers.

Formal hearings are scheduled for October and November. The ACCC are also conducting case studies to analyse issues facing suppliers and to examine prices and margins along the supply chains. The ACCC’s final report is due for release in February 2025. Based on the content and tone of the ACCC’s interim report, there does not appear to be any lingering, negative, long-term material impacts to Woolworths’ future earnings, at this time.

Regulatory Inquiry implications
While politicians remain vocal in encouraging regulatory authorities to investigate the practices adopted by supermarkets, this has occurred against a backdrop of a cost-of-living crisis brought about by inflation levels not seen in nearly 40 years. The Senate inquiry report on supermarket prices that was released in May made 14 recommendations for change. The most controversial recommendation was for the introduction of divestiture powers to breakup supermarkets where they have been found to misuse their market power. This recommendation was quickly rejected by the Prime Minister.

However, the ACCC Court proceedings commenced in September alleging the deception of consumers through discount pricing claims on 266 products is almost certain to result in a financial penalty on Woolworths. Financial penalties imposed by the ACCC are based on the financial gains and benefits made, or expected, from the conduct. In Woolworths’ case, the pricing anomalies on 266 grocery products over a 20-month period out of an estimated 20,000 store-wide products, are likely to be immaterial to Woolworths’ total earnings. Nevertheless, the ACCC has powers to impose penalties of up to $50 million and in a recent case against Qantas that involved deceptive conduct against consumers, the financial penalty was $100 million.

In FY24 Woolworths earned $3,223 million before tax, and a $100 million penalty would represent about 3 percent of EBIT. On the day the ACCC announced the lawsuit against Woolworths, its share price fell by about 5 percent, representing $2,000 million in market capitalisation. This clearly illustrates that the market has already priced in the risk of a substantial financial penalty being imposed on Woolworths.

The well-worn share market adage that “If it’s in the news, then it’s in the price”, certainly applies to the Woolworths share price at present.

The regulatory uncertainty is likely to persist over the next 6 months and this uncertainty may weigh on the Woolworths share price throughout this period. The grocery duopoly is unlikely to be dismantled, and Woolworths are now acutely sensitive to negative consumer sentiment, and so it is reasonable to assume that the negative share price impact on Woolworths has been absorbed by shareholders.

This implies that as inflation moderates in the year ahead and lower average cost prices are passed onto customers, investor sentiment may gradually improve toward the stock. This should result in a share price that reflects the Group’s long-term earnings growth potential which has been a feature of Woolworths for the past several decades.