ACCC ‘threat to retail earnings’

JOHN DURIE
THE AUSTRALIAN
The Australian Competition and Consumer Commission’s campaign against the big supermarket chains amounts to a “material threat to the earnings of both Coles and Woolworths”, according to Merrill Lynch analyst David Errington.
In a report released today, Mr Errington said the ACCC actions “will make it increasingly difficult for both Woolworths and Coles to extract improved terms from suppliers”.
“Given we believe the majority, if not all, of Coles and Woolworths ebit (earnings before interest and tax) growth over the past four ears has been made up from better buying from suppliers, we believe this is a material threat to earnings.”
Coles this week unveiled a new supplier charter with former Victorian premier Jeff Kennett as an independent arbiter, in part to offset perceptions it is ripping off suppliers.
The move came on the same day the federal government released a draft grocery industry code along the lines of the one submitted by Coles and Woolworths last November.
The ACCC has launched a series of cases in recent months against the retailers, including an unconscionable conduct case against Coles and a detergent cartel action against Woolworths, and has accepted undertakings from both major retailers on petrol discounting.
Mr Errington noted Woolworths’ 8 per cent profit margin was double that of international peers.
He noted Coles earnings before interest and tax had increased at a compound rate of 16.5 per cent since 2009 with sales up just 5.5 per cent, while Woolworths earnings have increased by 8.5 per cent on a 5 per cent sales increase over the same period.
“We think it is logical to conclude suppliers have been funding the majority of the growth in earnings of the food retailers and particular given costs of doing business have increased,” Mr Errington said.
“The resource of opportunity for Coles and Woolworths to extract improved buying terms from suppliers looks to be ending based on the action of the ACCC,” he said.