Sighs Of Relief Post Supermarkets Inquiry

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In the wake of the ACCC supermarkets inquiry, analysts keep earnings forecasts unchanged noting major players may ultimately benefit.

-Heat subsides for Coles and Woolworths post ACCC review
-Analysts see only limited near-term implications for the sector
-Some negatives for the fresh food segment

By Mark Woodruff

Scrutiny by the regulator and the upcoming Federal election have been key share price overhangs for Coles Croup ((COL)) and Woolworths Group ((WOW)), restricting their ability to grow margins in a tough competitive environment, highlights RBC Capital.

Now, the election is the only hurdle left to clear, after the final report from the Australian Competition and Consumer Commission’s (ACCC) supermarket inquiry contained few near-term implications of a material nature for the sector.

Apart from some implications for the fresh food segment, the enquiry may ultimately benefit the major players inside the local industry.

Jarden certainly believes near-term implications are limited, with no forced divestiture, land-banking, or pricing rules recommended, albeit everyday low pricing (EDLP)/Hi-Lo conclusions were deferred owing to an ongoing court case.

Importantly, Citi highlights the report does not recommend regulating grocery pricing or imposing restrictions on promotional strategies.

While media publicity around the announcement is likely to negatively impact the supermarkets in the short-term, Citi does not expect a material impact to earnings from the 20 recommendations contained in the report.

Recommendations included clearer pricing practices, communication of shrinkflation, greater transparency for suppliers (particularly in fresh) and reforms to planning and zoning laws to enable more competition.

Supply chain and trading arrangements accounted for 11 of the recommendations, followed by consumer experiences and outcomes and retail competition with six and three, respectively.

Acknowledging consumers currently benefit from a relatively efficient food supply system, the ACCC concedes substantial pro-competitive changes are unlikely in the near-term.

Aldi has no current plans to materially expand its network beyond its current store footprint, which means any competitive impact will largely come from like-for-like sales growth, highlights RBC, while IGA’s store network has largely contracted since 2008.

Jarden believes the ACCC report should function as a line in the sand for Coles and Woolworths to begin rebuilding brand equity and customer trust eroded by prior inquiries. Woolworths has suffered the most reputational damage, the broker notes, but now stands to benefit the most, followed closely by Coles.

The analysts highlight the report’s recommendations could accelerate a shift toward everyday low pricing (EDLP), which, if executed effectively, may ultimately support margins and improve customer perception for the major supermarket chains.

Potential new pricing transparency rules are likely to see EDLP for Coles and Woolworths moving above the respective 16% and 19% of sales currently, suggests Jarden, which could create risk for Aldi, Chemist Warehouse/Sigma Healthcare ((SIG)), as well as Bunnings ((WES)) and IGA/Metcash ((MTS))..

Potentially negative implications for fresh food

The inquiry found a significant bargaining power imbalance between Coles/Woolworths and some suppliers, notes Goldman Sachs, especially around fresh produce,

Key recommendations include a push for greater transparency about the weekly tendering process, supply forecasts, and market reporting obligations.

Potentially impacting fresh margins, Citi highlights recommendation 15 of the ACCC report states Aldi, Coles and Woolworths should not be able to unilaterally reduce wholesale fresh produce prices or volumes agreed with suppliers in their weekly tendering processes.

Jarden agrees this requirement to lift transparency, particularly around wholesale pricing, may increase cost-to serve and the ability to manage margin.

Outlook

Last week, prior to the release of the ACCC report, Macquarie contemplated potential share price upside for both major players in the sector.

As per previous enquiries into the banks, Qantas Airways ((QAN)) and childcare, the broker observed the market tends to “sell the rumour” and “buy the fact”, with share prices materially improving after the release of the regulator’s conclusion.

Macquarie felt the re-rating opportunity was greatest for Woolworths (upgraded to Outperform from Neutral) given its five-year low relative valuation compared to Coles Group.

Both Macquarie and Morgan Stanley also expressed a preference for supermarkets in the current risk-off environment as explained at https://fnarena.com/index.php/2025/03/19/risk-off-puts-supermarkets-in-focus/

For research updates following the ACCC report release, brokers have kept earnings forecasts and target prices unchanged.

Citi stays with its Neutral rating and $33 target for Woolworths Group and Buy, $21 target for Coles Group.

Goldman Sachs and Jarden both have Neutral ratings for Coles with an average target of $19.25. Goldman is Buy-rated on Woolworths (target $36.10), and Jarden has a $37 target with an Overweight rating, one notch below Buy in its rating system.

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