Former Coles Managing Director Ian McLeod has defended the supermarket group against accusations of unconscionable conduct towards its suppliers, after the Australian Competition and Consumer Commission (ACCC) initiated further proceedings against the supermarket group in the Federal Court.

Mr McLeod, who stepped down from Coles in July 2014 to take on a strategic role with Coles parent company Wesfarmers, defended the supermarket giant’s reputation and actions at The Australian and Deutsche Bank Business Leaders Forum in Melbourne late last week, saying that Coles was entitled to the profits it secured from its food and grocery suppliers and acted ethically when seeking payments. Mr McLeod said Coles would be “vindicated” in court when the unconscionable conduct proceedings instituted by the ACCC came to trial.

“I’m absolutely certain that the way we approach suppliers was professional and absolutely we operate ethically, and I do not believe there is anything systematically wrong in the way in which our buyers conduct their business,” Mr McLeod told The Australian newspaper.

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

Late last week the ACCC 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 in contravention of the Australian Consumer Law (ACL).

“This is a matter of significant public interest involving allegations of unconscionable conduct by a large national company in its dealings with small business suppliers in the highly concentrated supermarket industry,” said Rod Sims, ACCC Chairman.

“The ACCC alleges that Coles took advantage of its superior bargaining position by demanding money from suppliers that it was not lawfully entitled to, and was, in all the circumstances, unconscionable,” Mr Sims said.

Mr Sims said the ACCC had commenced these proceedings because it considered the alleged conduct was “contrary to the prevailing business and social values which underpin business standards that apply to dealings with suppliers”.

“These proceedings will provide the Court with an opportunity to consider whether conduct of this nature, if proven, is unlawful in the context of large businesses dealing with their suppliers,” Mr Sims said.

New allegations relate to everyday interactions between Coles and suppliers

These proceedings arise out of the same investigation as the proceedings that were instituted by the ACCC against Coles on 5 May 2014 in respect to Coles’ Active Retail Collaboration (ARC) program.

“The proceedings relating to ARC allege unconscionable conduct in the design and implementation of the ARC program specifically, whereas these new proceedings concern conduct which occurred in the course of Coles’ day to day interactions with suppliers,” Mr Sims said.

In the latest proceedings, the ACCC has alleged that in 2011, Coles, outside of its trading terms with the suppliers concerned:

• pursued agreements to pay Coles for “profit gaps” on a supplier’s goods, being the difference between the amount of profit Coles had wanted to make on those goods and the amount it had achieved;
• pursued agreements to pay Coles, both retrospectively and prospectively, for amounts it claimed as “waste” on a supplier’s goods which occurred after Coles had accepted the goods, and price reductions, or “markdowns” implemented by Coles to clear goods;
• imposed fines or penalties on suppliers for short or late deliveries.

It has been alleged that the causes of both profit gaps and “waste and markdowns” were usually outside the control of suppliers, and that the amount of the fines Coles imposed was unrelated to the value of the goods, to any loss that Coles might actually have suffered from the short or late delivery, or to the reasons for the short or late delivery.

The ACCC has alleged that Coles took advantage of its superior bargaining position and sought to achieve these outcomes by, among other things:

• demanding agreements to pay money where it knew, or ought reasonably to have known that it had no legitimate basis for doing so;
• failing to provide adequate information to suppliers to allow them to understand the basis upon which the demands were made;
• applying undue pressure by, in some cases:
  • threatening measures that were commercially detrimental to the suppliers if they refused to agree to payments;
  • by pressing suppliers for urgent responses to agree to payments; or
  • by making multiple demands of suppliers for different types of payments;
• withholding money due to suppliers and refusing to repay money when it knew it was not entitled to retain it.

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

The matter is listed for a directions hearing in Melbourne at 10am on Friday 24 October 2014 before Justice Gordon.

Coles rejects ACCC claims

Coles released a statement saying it rejected the claims of unconscionable conduct as alleged by the ACCC.

Coles said it was still working with all five suppliers named in the ACCC Statement Claim lodged in the Federal Court . The supermarket group said the individual communications with, and regarding, suppliers referred to in the ACCC’s Statement of Claim, “were part of ongoing commercial negotiations involving a much broader, longer-term trading relationship with each supplier”.

“These are normal topics for business discussions between grocery suppliers and retailers in Australia and around the world,” Coles said in the statement. “Furthermore, commercial negotiations can be robust, regardless of the industry or sector.”

The allegations include a day previously called Profit Day. Coles said this was an administrative day where discussions were held with suppliers in relation to outstanding claims and additional business opportunities. Coles said the discussions, including those concerning “profit gaps”, were aimed at improving the profitability of products. According to  Coles, “profit gaps can occur when a product’s financial performance fails to meet business plans or expectations discussed between Coles and its suppliers”. Coles said products with poor sales performance limited the supermarket group’s ability to “deliver value to customers”.

Coles said the failure of suppliers to deliver agreed quantities of stock at agreed times, contrary to the terms of their contracts with Coles, resulted in “significant shortages of stock in store” and that “empty shelves are a major source of customer frustration”. During the cited period in 2011, Coles said its team members were working to get products on shelves for customers in the lead-up to Christmas, the busiest trading period of the year.

According to Coles, high levels of waste or the poor performance of products can contribute to higher prices for customers, which is why Coles ‘actively manages’ these issues. Product waste can arise from various means including faulty packaging of product by suppliers, suppliers delivering products too close to their use by date or mishandling by suppliers or Coles.

“In other words, responsibility for waste may lie with the supplier, the retailer or it may be shared,” Coles said. “Again, payments for waste are a common business practice in retail in Australia and around the world,” it said.

Coles said it conducts “substantial training” with all team members to ensure that its suppliers are treated in an open and fair manner. The supermarket group said that since 2011 Coles had taken “substantial steps to improve its ways of working with suppliers”. Coles said it had also been a “leading voice” since 2013 in the industry-led drafting of the Food and Grocery Code of Conduct, which is currently with the Department of Treasury.

Australian Food News reported in August 2014, that Coles had initiated a Supplier Charter with the aim of strengthening relationships with suppliers. The Charter is a formal commitment to deal in good faith with our suppliers and provides suppliers to Coles with a strong, independent and confidential dispute resolution process. Former Victorian Premier Jeff Kennett has been appointed as the independent arbitrator under the Charter.

AFGC welcomes court action

The ACCC action has been welcomed by food and grocery manufacturers industry representative body the Australian Food and Grocery Council (AFGC). The AFGC said testing allegations about the mistreatment of suppliers by Coles was the best way to ensure a competitive market and fair deals for consumers.

Gary Dawson, AFGC Chief Executive, told ABC news that it was time allegations that had been swirling around for years were “properly tested”.

“Over recent years, there have been widespread reports of these sorts of practices being deployed by the major supermarkets to boost their bottom line at the expense of their suppliers,” Mr Dawson told the ABC.

“So it’s very important these practices be tested in court, these allegations be tested thoroughly because it’s in everyone’s interests, including consumers, that there be a fair and competitive market,” Mr Dawson said.

“There’s no surprise here for anyone who’s involved in the food and grocery space, the key reason why these sorts of practices are covered by the proposed industry code of conduct is that they’ve been popping up and reported regularly over the last few years,” Mr Dawson said.

“Importantly, when you get practices like retrospective demands for payments for all sorts of things with dubious justification, it does have a chilling effect on investment, on confidence,” Mr Dawson said. “It erodes competitiveness and ultimately that flows through to less choice for consumers,” he said.