Coles vs the ACCC

 

Dukan, mcleodJohn Durkan, the incoming MD of Coles food and liquor division, is set for an uncomfortable start in his new role, with the Australian Competition and Consumer Commission (ACCC) pursuing an unconscionable conduct claim against the supermarket chain.

The competition regulator has instituted proceedings against Coles in the Federal Court alleging that retailer overstepped the mark in its demands on suppliers in respect to trading terms and rebates charged under a program devised by Boston Consulting Group, called Active Retail Collaboration.

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Although the proceedings follow an investigation by the ACCC involving confidential discussions with suppliers, court documents include evidence sourced from suppliers under the formal information gathering powers of the regulator.

The ACCC was approached by around 50 suppliers in response to an announcement about and investigation into Coles’ ARC program in February 2012, but 200 suppliers are included in the evidence lodged with the court by the ACCC.

Inside Retail PREMIUM understands that many of the suppliers named in the documents are concerned about repercussions, including losing shelf space or having their products deleted as a result of the court action.

But the ACCC and the Federal Minister for Small Business, Bruce Billson, have warned that any punitive action or intimidation by Coles will be responded to with the full force of law.

Coles has indicated it will vigorously defend the court proceedings and will stand by the executives named in the court documents.

The matter is listed for a directions hearing in Melbourne on June 6, with the ACCC seeking pecuniary penalties, declarations, injunctions, and costs.

It is continuing with a broader investigation into the supplier relationships of Coles and Woolworths, with the regulator identifying a number of areas of concern, including failure to pay agreed prices, discrimination in favour of homebrand products, and threats to remove products from shelves if claims for extra payments or penalties are not paid by suppliers.

The ACCC is also understood to be concerned about the impact of the behaviour of the two dominant supermarket chains on competition among suppliers, with manufacturers being unable to innovate and reinvest products because of incessant and hefty levy and payment demands of the retailers outside agreed terms of trade.

ColesInside Retail PREMIUM understands that the impact of the $1 milk scheme on suppliers, the relocation of some manufacturers overseas, and the falling profitability of suppliers, including Goodman Fielder and Coca Cola Amatil, are being examined.

Essentially, the ACCC has started to assess not just the competition issues associated with Coles, Woolworths, and other retail chains and independent supermarkets, but also the impact on competition in supply channels resulting from their dominant positions.

Former ACCC chairman, Graeme Samuel, is not convinced that his successor, Rod Sims, will be able to secure any significant change in the market, and other industry observers have the view that “not only has the horse has bolted but the entire herd is out”, as one source told Inside Retail PREMIUM.

There is a view that it will be virtually impossible to scrutinise the ongoing behaviour of Coles and Woolworths even if the current legal action succeeds, because of the difficulty in distinguishing between unconscionable actions and robust negotiations which the retailers claim is to the advantage of consumers.

In the current legal proceedings, the ACCC alleges that in 2011, Coles developed a strategy to improve its earnings by obtaining better trading terms from its suppliers. The ACCC argues that Ian McLeod, the current MD of Coles, and Durkin were key players in the implementation of the program.

Both executives have been named in court documents which allege that 200 smaller suppliers were unfairly disadvantaged by the program in a breach of consumer competition laws.

In court documents, the ACCC alleges 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 resulted from changes it made to its supply chain.

Coles’ target was to obtain $16 million in ARC rebates from smaller suppliers who were required to agree to participate in the retailer’s program or face “commercial consequences”.

The ACCC claims 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 claimed supply chain benefits, which it says is unconscionable conduct.

The ACCC says Coles provided misleading information to suppliers about the savings and value to them from the changes made to the ordering system and has used undue influence and unfair tactics against suppliers to obtain payments of the rebate.

It claims Coles took advantage of its superior bargaining position by, among other things, seeking payments when it had no legitimate basis for seeking them; and by 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.

Rod Simms, ACCC chairman, said the conduct of Coles’ alleged by the ACCC in the proceedings was capable of causing significant detriment to small suppliers’ businesses.

“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.

“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.

“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,” Sims 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.”

The Australian Food and Grocery Council has welcomed the ACCC legal against Coles, with CEO, Gary Dawson, pointing out the “serious matters” before the court have “been hanging over the industry for years”.

“It is important that these allegations be tested in court because they go to the heart of whether we have a properly functioning food and grocery market in Australia under the current market power imbalance,” Dawson said.

“Consumer interest is best served by a properly functioning competitive market and the ACCC has a key role in ensuring fair and effective competition across the supply chain.”

Dawson said the ACCC announcement about the legal proceedings underscores the importance of an effective industry code of conduct which will deliver more contractual certainty, encourage better sharing of risk, and provide a practical dispute resolution mechanism without excessive regulation or compliance costs.

“It also underlines the significance of the current competition law review which will examine the impact of vertical integration and market power in key industry sectors, including supermarket retailing,” Dawson said.

This article first appeared in Inside Retail PREMIUM issue 1998.

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