Is Woolies heading for a forced break up?

A chorus of politicians and suppliers are pushing back

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published July 9, 2012 10:30 am AEST

According to a report in Friday's Sydney Morning Herald (SMH), Woolworths Limited (ASX: WOW) is pressuring suppliers to cut their prices by 5-10%, or risk their products not being stocked. Woolworths is stepping up pressure on its suppliers, to help the company in the price war with Wesfarmers Limited (ASX: WES) owned Coles.

The Australian Food and Grocery Council (AFGC) issued a briefing note to its members last week advising them of the actions. The AFGC said that Woolies had justified the cuts on the basis that some suppliers had been price-gouging. Given the complaints to the Australian Competition and Consumer Council (ACCC) from suppliers, one wonders how much truth there is to that statement.

Five months ago, the ACCC called on suppliers to 'dob' in supermarkets that abused their power. According to the SMH,

"more than 50 suppliers had contacted the ACCC with complaints about the big two supermarkets, and Senator Nick Xenophon said the 50 figure was just the tip of the iceberg, noting the ABC TV's Lateline had contacted 100 suppliers in vain to speak out publicly."

Woolworths and rival Coles control over 80% of the supermarket sector. Add in Metcash Limited's (ASX: MTS) IGA and Franklins stores, and my guess is that between the three, they control more than 90% of the supermarket sector, with the remainder being Aldi and independent operators.

Senaton Nick Xenophon, an outspoken critic of both Woolies and Coles and member of the Federal government's Senate Select Committee on Food Processing, suggested on the Lateline program earlier this year, that they only way to solve the issue would be to,

"pass US-Style Anti-Trust laws that would require Coles and Woolworths to be broken up, so that each of them can't control more than 20% of the market share."

That's fairly dramatic action to take, and one I personally can't see happening – but that's not to say it couldn't happen.

Federal MP Bob Katter has suggested the market power wielded by Coles and Woolworths is a bigger issue than asylum seekers. He said the tactic employed by the big two were hurting farmers and producers.

Entrepeneur Dick Smith has also weighed into the debate, saying that the Woolies and Coles strategy of pushing local companies' products off the shelves in favour of their in-house brands is bad for Australian-owned companies.

While Coles and Woolies have repeatedly denied that they are breaching any laws, some have questioned whether they have an ethical responsibility that is being breached.

The Foolish bottom line

The Senate Committee on Australia's Food Processing Sector is due to report back to the Senate on 16^th August 2012. Expect to see and read much more about the supermarket sector and the friction between the supermarkets and suppliers between now and then.

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Motley Fool writer/analyst Mike King is concerned, as he owns shares in Woolworths. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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