ACCC takes action against Coles for alleged unconscionable conduct towards its suppliers

Posted by AFN Staff Writers on 5th May 2014
ACCC takes action against Coles for alleged unconscionable conduct

The Australian Competition and Consumer Commission (ACCC) has instituted proceedings in the Federal Court of Australia against Coles Supermarkets Australia Pty Ltd and Grocery Holdings Pty Ltd (together, Coles) alleging that Coles engaged in unconscionable conduct as part of its Active Retail Collaboration (ARC) program, in contravention of the Australian Consumer Law (ACL).

The ACCC alleges that in 2011, Coles developed a strategy to improve its earnings by obtaining better trading terms from its suppliers. It is alleged that one of the ways Coles sought to improve its earnings was through the introduction of ongoing rebates to be paid by its suppliers in connection with the Coles ARC program, based on purported benefits to large and small suppliers that Coles asserted had resulted from changes Coles had made to its supply chain.

Coles’ target was to obtain $16 million in ARC rebates from smaller suppliers. Coles was ultimately seeking an ongoing ARC rebate in the form of a percentage of the price it paid for the Supplier’s grocery products. For its smaller suppliers, this rebate was the sum of a percentage that Coles asserted referred to the value to the supplier of being able to access the Coles supplier portal and, where applicable, a percentage based on the asserted value to the supplier for Coles having changed its ordering patterns to order products in “economic order quantities”.

Allegations in detail

The ACCC alleges that in relation to 200 of its smaller suppliers, Coles required agreement by the supplier to the rebate within a matter of days. If these suppliers declined to agree to pay the rebate, Coles personnel were allegedly instructed to escalate the matter to more senior staff, and to threaten commercial consequences if the supplier did not agree. The ACCC alleges that, in a number of cases, threats were made when suppliers declined the agreement to pay the rebate.

The ACCC alleges that Coles has engaged in unconscionable conduct towards 200 of its smaller suppliers, in breach of the ACL by, among other things:

  • providing misleading information to suppliers about the savings and value to them from the changes Coles had made;
  • using undue influence and unfair tactics against suppliers to obtain payments of the rebate;
  • taking advantage of its superior bargaining position by, amongst other things, seeking payments when it had no legitimate basis for seeking them; and
  • requiring those suppliers to agree to the ongoing ARC rebate without providing them with sufficient time to assess the value, if any, of the purported benefits of the ARC program to their small business.

“The conduct of Coles alleged by the ACCC in these proceedings was capable of causing significant detriment to small suppliers’ businesses,” said Rod Sims, ACCC Chairman. “This could have resulted in these businesses becoming less able to plan and less able to innovate in the market, with resulting reduced economic efficiency and consumer detriment,” he said.

Coles used “undue pressure and unfair tactics”, ACCC

“The ACCC alleges that Coles used undue pressure and unfair tactics in negotiating with suppliers, provided misleading information and took advantage of its superior bargaining position, so that its overall conduct was in all the circumstances unconscionable,” Mr Sims said. “If this conduct is established in court, the ACCC expects that the community will share the ACCC’s view that business should not be conducted in this way in Australia,” he said.

“When we called for market participants to provide information to the ACCC on a confidential basis to assist the ACCC’s investigation, I committed that the ACCC would seek to maintain that confidentiality,” Mr Sims said. “In accordance with that commitment, the documents and information relied on by the ACCC in these proceedings were obtained by use of the ACCC’s compulsory statutory information gathering powers in a subsequent phase of the investigation’, he said.

The ACCC is seeking pecuniary penalties, declarations, injunctions and costs.

The proceedings against Coles arise from a broader investigation by the ACCC into allegations that supermarket suppliers were being treated inappropriately by the major supermarket chains. That broader investigation is continuing.

Coles responds to ACCC action

Coles has responded to the ACCC action, saying it will “vigorously defend” the allegations made against it by the ACCC.

The supermarket group said the ACCC’s legal action concerned a detailed supply chain program implemented by Coles over two years ago as a part of its strategy to develop a “more efficient and internationally competitive supply chain”. Coles said the project involved improvements to both supply chain collaboration and efficiencies in logistics. According to Coles, the program was designed to deliver benefits to Coles, suppliers and customers through lowering costs and improving availability of stock in its stores.

Coles said in a statement that is was “totally committed to negotiating fairly and working collaboratively with its suppliers, providing opportunities for suppliers to grow” and that this “has been integral to Coles’ turnaround strategy from the start”.

Coles said it “proactively seeks to build strong relationships with its supplier partners, supporting the growth of a resilient and competitive grocery manufacturing industry in Australia”. It said its support for Australian food manufacturing has “never been stronger”, and that over the last five years, it had worked to “significantly improve relationships with suppliers and to share the benefits of the strong growth in Coles’ customer numbers during this time”. Coles said independent surveys strongly supported this view.

The supermarket group said it had supported the proposed industry-led Food and Grocery Code of Conduct as “part of its continuing commitment to improving supplier relationships”.

Chronology of the ACCC’s investigation

November 2011

Media reports indicated that supermarket suppliers were being treated inappropriately by the major supermarket chains.

November 2011 – February 2012

The ACCC sought information from market participants about these concerns. But it became clear that suppliers were reluctant to speak to the ACCC for fear of what they perceived may be the consequences of providing information to the ACCC.

February 2012

The ACCC Chairman called on suppliers to provide information to the ACCC on a confidential basis, on the basis that the ACCC would seek to protect and maintain that confidentiality.

The ACCC said the call from its Chairman in February 2012 resulted in around 50 market participants approaching the ACCC on a confidential basis to discuss practices by the major supermarket chains that they were concerned about. Having identified areas of concern, the ACCC then commenced an in-depth investigation into those issues.

13 February 2013

The ACCC provided an update to the Senate Estimates Committee of its investigations. The ACCC advised that the allegations raised with the ACCC, which were the subject of its investigation, included allegations of some conduct that the ACCC considered did not conform to acceptable business practice and may be unconscionable or a misuse of market power.

Such conduct, which was not necessarily identical across suppliers, product lines or even supermarkets, included:

  • persistent demands for additional payments from suppliers, above and beyond that negotiated in their terms of trade;
  • the imposition on suppliers of penalties that did not form part of any negotiated terms of trade, and which apparently do not relate to actual costs incurred by the major supermarket chains as a result of the conduct which has led to the penalty being imposed;
  • threats to remove products from supermarket shelves or otherwise disadvantage suppliers if claims for extra payments or penalties are not paid;
  • failure to pay prices agreed with suppliers; and
  • conduct discriminating in favour of home brand products.

June 2012 – December 2013

Extensive in-depth investigation using compulsory information gathering powers that required suppliers and Coles to provide information.

These proceedings are the first proceedings to arise from the ACCC’s broader investigation.