Ian McLeod, managing director for Wesfarmers' (ASX: WES) Coles division, has warned against any further regulations being imposed against food retailers and has lashed out at the company's critics, stating that his company will continue to force prices down over coming years.
Coles and Woolworths (ASX: WOW) have both been the subject of much criticism in recent times for lowering prices to unsustainable levels, putting enormous pressures on smaller grocers such as Metcash's (ASX: MTS) IGA stores and Aldi. With a combined 75% of the market under the two behemoths' control, there have been calls for market share caps to be imposed, as well as forced divestments and a mandatory code of conduct.
McLeod, however, has stated that Coles has no intention to stop price cutting, instead promising to continue the trend in order to fuel sales and earnings after nearly doubling profits within the last five years of following this strategy. "That's what we've already done and over the next five years we'll continue doing much more of it".
McLeod warned that any decision to impose restrictions on the company would drastically impact on the way that votes were cast for politicians. According to McLeod, families are saving nearly 5% per year in food bills – claiming that even the consumers who shop elsewhere are benefiting from the competitive prices. As such, should prices be affected by new regulations, the party behind the decision would be hit with heavy backlash for doing so. McLeod said "politicians that attack Coles should remember that 18 million customers support lower prices – and they all vote".
Based on increasing profitability and investors seeking high yielding stocks, both Woolworths and Wesfarmers have given shareholders very impressive returns in the last 12 months, but have both fallen in value over the last month or so as investors lock in profits. Woolworths is currently valued at $32.50 – down 11.8% from its high in April, whilst Wesfarmers is sitting at $38.60 – also down 12.7% from its high.
Foolish takeaway
Whilst consumers are certainly benefitting from the drastic cost-cutting being driven by Coles and Woolworths, it is the farmers and other suppliers of products that must suffer – not to mention other smaller competitors. A growing ethical awareness within society could negatively impact the two companies in the long run, as it becomes more and more apparent that further regulation is, indeed, required.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
