Coles admits to threatening suppliers, denies allegations of unconscionable conduct

Posted by AFN Staff Writers on 2nd July 2014
Coles admits to threatening suppliers, denies allegations of unconscionable conduct
Coles admits to threatening suppliers, denies allegations of unconscionable conduct

Australian supermarket group Coles has admitted it threatened supplier with sanctions such as refusing new stock products and blocking access to sales forecasts when the suppliers declined to pay extra rebates to participate in a new supply chain program.

In a 34-page document submitted late on Monday 30 June 2014 to the Federal Court in Melbourne, Coles defended itself against allegations of unconscionable conduct by the Australian Competition and Consumer Commission (ACCC). It has been reported that the document contains more than 98 “admissions”, including using formalised scripts to sell the benefits of participating in the new supply chain program, and ‘escalating’ resistant suppliers up the Coles management chain.

However, Coles has rejected the allegations by the ACCC that it contravened Australian Consumer Law by acting unconscionably, using misleading information and applying undue influence to force suppliers to participate in the program.

Australian Food News reported in May 2014 that the ACCC had instituted proceedings in the Federal Court of Australia against 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 alleged that in 2011, Coles developed a strategy to improve its earnings by obtaining better trading terms from its suppliers. It was 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.

The ACCC alleged 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.

It has been reported that the rebates ranged from about 0.7 per cent to more than 1 per cent of sales, depending on the size of supplier.

The ACCC alleged 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.

It has been reported that Coles provided category managers with training, manuals and scripts – including threats to delete suppliers who refused to pay up – and awarded prizes to category managers who ­collected payments.

In its defence document Coles said that participation in the ARC program was at all times voluntary. Coles said it consulted with suppliers about the value of participating in the program and maintained trading relationships with suppliers even if they refused to sign up.

Coles said that about 168 smaller suppliers agreed to participate in the ARC program and about 32 refused to take part.

The case is due to return to the Federal Court in Melbourne for further directions on August 1.

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.

May 2013

ACCC institutes proceedings against Coles in the Federal Court. These proceedings are the first proceedings to arise from the ACCC’s broader investigation.