WOOLWORTHS has one of the highest profit margins of any large supermarket chain in the world, Australian Competition and Consumer Commission (ACCC) chairman Rod Sims says.
And while the chain's plan to cut grocery prices should be a win for shoppers, the regulator said the ACCC would use the extra clout of a new code of conduct to help protect suppliers.
Mr Sims said the profit margins of Woolworths and rival Coles were largely a result of a "very cosy duopoly" that had expanded for decades, but which was now being reined in somewhat by the success of the German discount chain Aldi, with its focus on dry groceries.
He said that, while the Woolworths pledge to cut prices was likely to hit shareholders in the company, it would be a plus for overall competition and for supermarket shoppers. "They have very high margins businesses compared with overseas," Mr Sims said.
The ACCC will be closely monitoring the market, armed with the new food industry code of conduct, enabling it to conduct audits and demand documents.
It has been drawn up with the support of Coles and Woolworths.
But large food suppliers in the $88 billion food and grocery market in Australia are nervous about the impact on them of Woolworths' plan to find $500 million of cost savings from its own business and use it to fund price cuts.
Terry O'Brien, chairman of the Australian Food and Grocery Council, the umbrella body for more than 100 food and grocery manufacturers and suppliers including Arnott's Biscuits, George Weston Foods, Kellogg Australia, McCain Foods, Nestle Australia, and Unilever Australasia, said suppliers were concerned about the impact on overall profits.
"It means there's less profit in the profit pool," Mr O'Brien said. "To me, it just shifts profits from one store to another. Everyone just ends up with a lower profit. It puts everyone on a downward spiral".
But Mr O'Brien, who is chief executive of Simplot Australia, a food maker with brands including Edgell, Birds Eye and John West, said food manufacturers were pleased that Woolworths had promised to fund the price cuts by pulling $500 million in costs out of its own business.
"That's a bit of a relief," he said.
The likelihood of a retaliation by Coles, which has been been highly successful in gaining market share and momentum in supermarkets through its "Down Down" supermarket marketing, is high. This has led to fears of a full-blown price war. "I'd prefer it wasn't happening," Mr O'Brien said.
Simplot Australia, with annual revenues of $1.24 billion, is one of the country's biggest suppliers to both Woolworths and Coles.
Mr Sims said there would always be keen negotiations between the big chains and their suppliers, but the ACCC would be watching carefully for instances where the mark was overstepped.
"We don't mind robust negotiations. Our problem is when there's arbitrary demands made mid-contract and threats made," he said.
The two big chains had become too powerful and a duopoly was able to form over the past few decades, he said, even though the expansion of Aldi had gained it more critical mass and started to make a difference.
"We've had a very cosy duopoly until recent years," Mr Sims said.
Late last year, Coles agreed to settle an "unconscionable conduct" court action brought by the ACCC.
Coles managing director John Durkan admitted Coles had "crossed the line", with five suppliers not treated with transparency and respect in relation to Coles demanding payments to help reach profit targets.
Woolworths chief executive Grant O'Brien has promised that his company will act in a "rational and disciplined" way and said that, while Woolworths was competitive in the supermarket sector, it needed to be cheaper.
Woolworths says the $500 million in cost savings will come from its supply chain, information technology, logistics and store support services, and not from suppliers.
The company, already under pressure because of first-half 2014-15 losses of $103 million at its struggling hardware operations led by Masters, has reacted to a sharp drop in sales growth in the supermarket operations in the December quarter of 2014.
Its food and liquor sales growth on a like-for-like basis, which strips out the impact of new store openings, slumped to 1.2 per cent in the December quarter, compared with 4 per cent at rival Coles.
Profit margins in Woolworths' food, liquor and petrol operations reached a record 7.43 per cent on an earnings before interest and tax basis in the first half of 2014-15, compared with 7.02 per cent a year earlier.