Yahoo Finance Woolworths and Coles suffer $4 billion bloodbath after Aussie 'battlers conned'
The two supermarkets have been accused of misleading shoppers with Prices Dropped and Down Down labels.
Clean up on aisle seven because there's been a stock market bloodbath at two of the biggest supermarkets in Australia. Woolworths and Coles have been hammered after the consumer watchdog announced legal action against them.
Woolies' share price has fallen more than 6 per cent or $2 since the start of the week and Coles has plummeted 5.35 per cent or by nearly $1. That fall roughly equates to around $4 billion over just two days.
Troublingly, "battlers" were the ones targeted in the alleged rort, in which the Australian Competition and Consumer Commission (ACCC) allege prices were temporarily increased for short periods before being placed on "Prices Dropped" and "Down Down" promotions.
That's the opinion of former ACCC boss Allan Fels, who led a recent inquiry into alleged price gouging and unfair pricing in Australia.
"What is particularly galling about the scandal is the products for which prices were allegedly manipulated include many staples of ordinary and low-income families – Tim Tams, Kellogg’s and Weet-Bix cereals, Moccona coffee, Sprite soft drink, Bega cheese, Colgate toothpaste, Maggi noodles, Sakata rice crackers, Whiskas cat food and more," Professor Fels wrote for the Sydney Morning Herald.
"These are not luxury items favoured by wealthier shoppers.
"Those being allegedly conned and exploited were families struggling at the height of the cost-of-living crisis."
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He has supported the potential penalty handed down by the Federal Court being in the tens of millions of dollars to "deter businesses from treating this behaviour as a small cost risk".
JPMorgan analyst Bryan Raymond said the companies faced a far bigger issue — losing shopper support.
“The legal case against the retailers may not be as strong as the case decided in the court of public opinion,” he explained to the Australian Financial Review.
Goldman Sachs believes the ACCC's lawsuit could turn even more shoppers and investors away in the coming months.
"We see risk from negative consumer sentiment towards the major supermarkets from the announcement, which may negatively impact sales," the investment banking firm said.
Coles earned $1.1 billion in profit last year, while Woolworths made $1.7 billion, which was reduced to just $108 million due to issues in the New Zealand arm of the business.
What are the allegations against Coles and Woolworths?
On Monday, the ACCC filed separate lawsuits against Coles and Woolworths, alleging the two supermarkets misled the public over the price of more than 500 products.
The watchdog believes the supermarkets sold "tens of millions of the affected products" and gained "significant revenue" from those sales.
Woolworths and Coles have been accused of inflating the prices of some products by at least 15 per cent while the purchase prices remained steady for at least six months and in some cases a year.
They were then allegedly shifted to the supermarkets' ongoing discount promotions - "Prices Dropped" for Woolworths and "Down Down" for Coles.
The ACCC used the Oreo Family Pack Original 370g as an example, where Woolworths offered the product for $3.50 on a pre-existing ‘Prices Dropped’ promotion for at least 696 days.
The sweet treat was then increased to $5 for 22 days and less than a month later it had a 'Prices Dropped' label slapped onto it and it was sold at $4.50.
The ‘Prices Dropped’ price of $4.50 was in fact 29 per cent higher than the product’s previous regular price of $3.50.
Fels noted that alleged breaches had been picked up by shoppers, many who went online to report discrepancies.
Aussie consumers were 'mislead' by the discount labels
ACCC Chair Gina Cass-Gottlieb alleged Coles and Woolworths breached consumer law by misleading customers about discounts which were "illusionary".
“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," she said.
"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 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."
What penalties are the major supermarkets facing?
The supermarkets will have to front federal court to answer the allegations outlined by the ACCC.
The maximum penalty for each breach of the Australian Consumer Law since November 2022 can be one of three things and is whatever is greatest out of:
$50 million
Three times the value of the "reasonably attributable benefit obtained" during the alleged breach
If the court can't determine that value then it's 30 per cent of the corporation's adjusted turnover during the breach turnover period
But Barrenjoey analyst Tom Kierath believes the fine could get into the billions if the third option is chosen.
He estimates Woolworths could be hit with a $42.7 billion fine and Coles could face a $15.6 billion penalty under the 30 per cent turnover penalty.
But he noted that a fine that large would have a dramatic effect.
“While any penalties imposed are a matter for the court to determine, an imposition of fines of anywhere near this magnitude, in our view, would decimate the supermarket industry and any future investment, which would ultimately hurt Australian consumers,” Kierath said.
Supermarket overhaul as PM piles on 'outrage'
The Prime Minister believes Aussies are "rightly outraged" at the allegations, especially amid a cost-of-living crisis.
“When shoppers go to their checkout, they expect in a supermarket where they see the sign of ‘specials’ for it to actually be cheaper,” Anthony Albanese said.
He has unveiled a draft proposal of his government's new mandatory code of conduct for the food and grocery industry.
Coles, Woolworths, Aldi will soon face fines of up to $10 million or three times the financial benefit of the breach once the code is finalised.
Whistleblowers will also benefit from expanded protections to ensure they can speak out about dodgy company practices.
"We know there's more to do and my government wants to ensure that Australian consumers get a fair go," Albanese declared on Monday. "When families are doing it tough, they need a government that's on their side."
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