Have Woolworths and Coles shares been spared a break-up?

Both Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) have arguably been some of the go-to punching bags for Australian consumers over the past year or two as the cost of living crunch we’re all enduring started to bite.

Buying life’s essentials has only become harder for many Australian families since 2021. That’s thanks to rising interest rates and stubbornly high inflation taking a sizeable chunk out of the average household budget.

Much of the inflation swirling around the economy has been evident on supermarket shelves. As such, it’s probably fair to say that both Coles and Woolies have taken a bit of a hit in the court of public opinion.

So it was not too surprising to see the Federal Government act on some of these concerns earlier this year. In January, the government announced that former minister Dr Craig Emerson would lead a review of the Food and Grocery Code of Conduct.

Thanks to comments and opinions across the political spectrum in recent months, some investors may have started to worry that this review might recommend drastic changes to how Coles and Woolworths are allowed to operate in the Australian grocery space. Members of the Liberal, National and Greens political parties have all called for Coles and Woolworths to be ‘broken up’ in various ways.

Well, those investors can breathe a sigh of relief today.

Woolworths and Coles shares safe from breakup

Dr Emerson’s review has just released an interim report detailing its initial findings in the grocery sector.

The interim report makes several strong recommendations to the government on how to change supermarket regulations. These include making the now-voluntary Food and Grocery Code of Conduct mandatory for all grocery companies with more than $5 billion in annual revenues.

It also recommends significant penalties for any company that breaches the code. It noted that the current environment allows “no penalties for breaches”.

However, the report also comes out strongly against the idea of divestiture of a supermarket ‘break up’:

The review does not support a forced divestiture power to address market power issues in the
supermarket industry…

If forced divestiture resulted in a supermarket selling some of its stores to another large incumbent
supermarket chain, the result could easily be greater market concentration.

If large incumbent supermarket chains were prohibited from buying the divested stores, that would
leave only smaller supermarket chains and foreign supermarkets as potential buyers. Further, if these
smaller chains were not interested, or were not in a position to buy, these stores would be forced to
close…

This review’s recommendations to make the Code mandatory, with heavy penalties for major
breaches will, alongside effective enforcement of the existing competition laws, constitute a far more
credible deterrent to anti-competitive behaviour than forced divesture laws.

Foolish takeaway

So it seems that Coles and Woolworths will likely keep their present corporate structures, based on the findings of this review.

Owners of Coles and Woolworths shares will undoubtedly be pleased with this outcome — not that you’d know it from their stock prices today. At present, Woolworths shares are down 0.12%, while Coles stock has lost 1.28%.

The post Have Woolworths and Coles shares been spared a break-up? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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