Buying Coles and Woolworths shares? Here’s why the supermarkets are fuming over Chalmers’ new law

Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) shares are both significantly underperforming the benchmark on Monday.

In morning trade today, the S&P/ASX 200 Index (ASX: XJO) is down 0.6%.

As for the ASX 200 supermarket giants, Coles shares are down 1.7% trading for $21.43 apiece. And Woolworths shares are down an even steeper 2.4%, changing hands for $28.86 each.

Atop headwinds from the sell-down in US stock markets on Friday, both ASX 200 supermarkets look to be under pressure following Treasurer Jim Chalmers’ announcement over the weekend aimed to stamp out alleged price gouging.

Here’s what’s happening.

Coles and Woolworths shares facing new margin pressure

Over the weekend, the Labor government announced its intention to implement new rules targeting excessive pricing of groceries beyond a reasonable profit margin.

“One of the best ways to ease the cost of living for Australians is to help people get fairer prices at the checkout,” Chalmers said on Sunday.

Investors may be reevaluating the outlook for Coles shares and Woolworths shares, as the two companies are the only ones currently targeted by the legislation. If they breach the rules, they could face penalties of $10 million per violation.

The ASX 200 supermarkets were clearly displeased with the new rules.

“The law is unprecedented by targeting only two Australian-owned companies,” a Woolworths spokesperson said.

ASX 200 supermarket giants respond

Both Coles and Woolworths have made confidential submissions to Treasury officials on Chalmers’ new law, which were obtained by The Australian Financial Review.

Both companies noted that the legislation could, in fact, lead to higher prices.

Commenting on the new law that could impact Woolworths shares, the company said (quoted by the AFR):

Our pricing is highly dynamic, with thousands of changes weekly in response to competitive moves and promotions. Our systems are built to execute these price changes, not to create and store a detailed legal and economic justification for each one.

We would be required, at a minimum, to employ a dedicated full-time team for the sole purpose of monitoring whether our pricing is ‘excessive’, against unclear and unknown ‘benchmarks’. In the context of there being no evidence of ‘price gouging’, this simply adds cost to the Woolworths supermarkets business and puts us at a competitive disadvantage.

And with Coles shares also potentially facing a hit from the new law, Coles noted that it could add layers of red tape to pricing fruits and veggies. According to the company:

The unnecessary excessive pricing laws are likely to act as an impediment to supermarkets locking in prices further in advance. This is because of the risk of a significant divergence emerging between a price that is agreed well in advance and the ultimate market price at time of sale.

Coles added, “For every $100 customers spend at Coles, we make around $2.43 in profit, less than 3 cents in the dollar.”

With today’s intraday moves factored in, Coles shares are up 14.6% since this time last year. Woolworths shares have dropped 5.7% over this same period.

The post Buying Coles and Woolworths shares? Here’s why the supermarkets are fuming over Chalmers’ new law appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben 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 Woolworths Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.