The Australian Competition and Consumer Commission (ACCC) will watch the supermarket industry closely following Woolworths Limited's (ASX: WOW) pledge to cut costs and improve grocery prices.
In its recent interim earnings report, Woolworths outlined plans to invest heavily in its core Australian supermarket division which it said would be partially funded by $500 million in cost improvements. In turn, grocery prices would also be reduced, after having improved by an average 1.8% during the half.
Although this could impact the supermarket behemoth's margins in the near-term, the competition and consumer watchdog believes it will improve competition in the sector with consumers being the ultimate winners. At the same time however, the ACCC will also need to ensure the cost savings do not come at the expense of suppliers.
Woolworths and Coles, owned by Wesfarmers Ltd (ASX: WES), enjoy a dominant position in Australia's $88 billion grocery industry. Given their position, both have strong negotiating power with suppliers who are often forced to reduce their prices in order to gain space on the supermarkets' shelves. While this behaviour is great for competition, both companies have a history of "overstepping the mark" where "arbitrary demands (and) threats" were being made mid-contract, as reported by the Fairfax press.
As a prime example, the pressure the pair put on dairy farmers in recent years to lower their prices was documented in the media, as was Coca-Cola Amatil Ltd's (ASX: CCL) complaints that heavy discounting (and enormous pricing pressure) by the supermarkets had been one of the primary reasons behind its falling profits.
Indeed, the pair have admitted they have acted irresponsibly in the past but the ACCC will be watching closely to ensure it doesn't happen again. In its pledge to reduce costs, Woolworths has promised to remain disciplined in its approach, stating that it simply needs to become more competitive against Coles whilst remaining ahead of industry disruptors Aldi and Costco.
Although its supermarket investment will impact earnings in the near-term, it was a necessary decision given its disappointing profit results in recent times. With the shares currently trading at just $29.81 (and offering a 4.6% fully franked dividend), Woolworths shares are presenting as a solid buy today.
