Systemic Wage Risk in Australian Retail: Earnings Sustainability and Governance Exposure at Woolworths and Coles

The Australian retail sector is grappling with systemic wage risks that threaten the long-term earnings sustainability and corporate governance of its dominant players, Woolworths and Coles. Recent legal and regulatory developments underscore a critical juncture for these companies, as mounting compliance costs, reputational damage, and structural market imbalances converge to challenge their financial resilience.

Wage Risks and Remediation Costs: A Governance Crisis

A federal court ruling in 2025 exposed severe governance failures at Woolworths and Coles, particularly in their record-keeping for managerial overtime and entitlements. The court described Coles’ practices as a “calamity,” with remediation costs estimated between A$150 million and A$330 million [2]. These figures represent not just a financial burden but a systemic breakdown in corporate accountability. For context, Woolworths and Coles have historically reported annual operating profits in the range of A$1.5–2 billion [4]. However, the escalating costs of rectifying wage underpayments—compounded by potential future litigation—threaten to erode profit margins and divert capital from strategic investments.

The governance implications extend beyond compliance. The ACCC’s interim report highlights a “culture of opacity” at both companies, where poor record-keeping and lack of oversight have enabled systemic non-compliance [3]. This raises questions about board accountability and the effectiveness of internal controls, particularly as investors increasingly prioritize ESG (Environmental, Social, and Governance) metrics.

Market Dynamics and ACCC Reforms: A Double-Edged Sword

The ACCC’s 2025 report paints a stark picture of the supermarket sector’s oligopolistic structure, with Woolworths and Coles dominating 80% of the market [1]. While their high profit margins (averaging 5–7% over five years) suggest pricing power, the ACCC attributes this to limited competition rather than operational efficiency. The report recommends 20 reforms, including mandatory price transparency, supplier protections, and reduced barriers to entry for independent retailers [1].

These reforms could reshape the sector’s competitive landscape. For instance, requiring supermarkets to publish dynamic pricing data online would empower consumers and third-party comparison tools, potentially compressing margins. Similarly, harmonizing planning laws to favor smaller retailers could dilute Woolworths’ and Coles’ market dominance. However, the ACCC acknowledges that meaningful competition is unlikely in the short term, given the scale and infrastructure of the two giants [1].

Earnings Sustainability: Navigating Economic and Regulatory Headwinds

The FY24 earnings outlook for Woolworths and Coles is already strained by broader economic pressures, including constrained consumer spending and inflationary costs [4]. The added burden of wage remediation costs—expected to materialize in 2025—could exacerbate these challenges. For example, if both companies allocate A$250 million annually to address wage liabilities, this would consume approximately 12–15% of their combined operating profits [2]. Such a scenario could force cost-cutting measures, including reduced investments in supply chain modernization or sustainability initiatives, further undermining long-term competitiveness.

Moreover, the ACCC’s focus on “shrinkflation” and misleading promotions risks eroding consumer trust, which has already declined significantly [3]. A loss of trust could accelerate customer attrition, particularly as alternative retailers (e.g., discount chains or online platforms) gain traction.

Investor Implications: Balancing Risk and Resilience

For investors, the key question is whether Woolworths and Coles can adapt to these dual pressures. Strengthening corporate governance—through improved compliance frameworks, board diversity, and stakeholder engagement—will be critical. However, the ACCC’s reforms also present opportunities. For instance, greater price transparency could reduce regulatory scrutiny and rebuild consumer confidence, while supplier protections might stabilize input costs in the fresh produce sector [1].

That said, the path to sustainability is fraught. The ACCC’s inability to conclusively prove price gouging due to complex pricing models [1] suggests that regulatory enforcement may remain inconsistent. Investors must also weigh the likelihood of further wage-related litigation, which could emerge as a recurring drag on earnings.

Conclusion

The systemic wage risks facing Woolworths and Coles are not isolated compliance issues but symptoms of deeper governance and market structure flaws. While the ACCC’s reforms aim to foster competition and transparency, their success hinges on the willingness of these companies to embrace accountability. For long-term earnings sustainability, investors should monitor three key metrics: the pace of wage remediation, the adoption of ACCC-recommended governance practices, and the sector’s response to regulatory-driven market reforms. In an industry where trust and compliance are increasingly intertwined with profitability, the path forward demands more than short-term fixes—it requires a fundamental reimagining of corporate responsibility.

Source:
[1] ACCC recommends supermarket reforms to provide better outcomes for consumers and suppliers, [https://www.accc.gov.au/media-release/accc-recommends-supermarket-reforms-to-provide-better-outcomes-for-consumers-and-suppliers]
[2] Federal Court Slams Coles and Woolworths Over Record Underpayments, [https://www.channelnews.com.au/federal-court-slams-coles-and-woolworths-over-record-underpayments/]
[3] ACCC report finds Australians have lost trust in supermarket price claims, [https://www.abc.net.au/news/2024-09-26/accc-supermarket-inquiry-interim-report-released/104401682]
[4] Woolworths and Coles FY24 earnings to show challenging outlook, [https://www.reuters.com/business/retail-consumer/woolworths-coles-fy24-earnings-show-challenging-outlook-supermarkets-2024-08-26/]