11 December 2015
by Sue Mitchell

Woolworths accused of unconscionable conduct by ACCC

In a move that could crimp profits in the $90 billion food and liquor market, the Australian Competition and Consumer Commission wants to stop major supermarket chains from demanding payments from suppliers beyond formal supply agreements.

The ACCC has accused Woolworths of unconscionable conduct by trying to force suppliers to plug a $50 million hole in its December-half 2014 profits by demanding more than $60 million in extra payments in the weeks before Christmas last year.

The ACCC launched proceedings in the Federal Court on Thursday, alleging Australia's largest retailer engaged in unconscionable conduct in dealings with more than 800 Tier B or small to medium sized suppliers in contravention of Australian Consumer Law.

Woolworths defended the payment demands, saying its conduct was consistent with Australian and international industry practice to engage regularly with suppliers over performance.

However, an angry ACCC chairman Rod Sims said if the demands were in line with industry practice they needed to be stamped out.

"If behaviour such as we are alleging is industry practice then industry practice needs to change,"

"If people believe that's industry practice that's extremely unfortunate and something we should deal with - suppliers can't be in a situation where they get arbitrary demands."
said Mr. Sims

The ACCC's case caps off a horror year for Woolworths, which has downgraded profits three times in the last year and lost its chief executive, its chairman and a string of senior executives.

The ACCC alleges that in December 2014, Woolworths developed a strategy, approved by senior management, including former supermarkets managing director Tjeerd Jegen, to urgently reduce a $50 million short-fall in its first-half gross profits.

At the time, Woolworths' sales growth had slowed dramatically and the retailer was pushing up prices and taking labour out of stores in a desperate attempt to protect profit margins and meet its profit guidance.

It is alleged that Woolworths sought to reduce the shortfall by coming up with a scheme dubbed "Mind the Gap", whereby it systematically sought to obtain payments from a group of 821 supermarket suppliers.

Woolworths' category managers and buyers contacted the suppliers and asked for Mind the Gap payments ranging from $4,291 to $1.4 million - above and beyond payments outlined in supply agreements - giving them four days to pay.

Those who refused to pay were seen as not "supporting" Woolworths and Woolworths, in turn, threatened to stop supporting those suppliers.

Woolworths was seeking about $60.2 million in Mind the Gap payments and allegedly raised about $18.1 million in 20 days between December 4 and December 24.

The ACCC's action against Woolworths mirrors that taken two years ago against Coles, which was accused by the ACCC of trying to prop up profits by demanding additional rebates from suppliers under its Active Retail Collaboration program and charging suppliers fees and fines for "crimes" such as shrinkage and wastage that occurred in Coles' stores.

Coles initially denied the allegations and said demands for extra payments were in line with industry practice.

But, in a major mea culpa, Coles settled the case late last year, agreeing to pay more than $10 million in fines and refund more than $12 million to suppliers.

The ACCC alleges that Woolworths, like Coles, was in a substantially stronger bargaining position than its suppliers, did not have a pre-existing contractual entitlement to seek the payments, and either knew it did not have or was indifferent to whether it had a legitimate basis for requesting the extra payments.

"The ACCC alleges that Woolworths' conduct in requesting the Mind the Gap payments was unconscionable in all the circumstances," said Sims.

To make matters worse, Woolworths' alleged conduct came to the ACCC's attention around the time when there was considerable publicity about the settlement with Coles.

The ACCC is seeking injunctions, penalties, costs and orders which would force Woolworths to refund the $18.1 million paid by suppliers and restrain Woolworths from seeking similar payments from suppliers for five years unless such payments were part of grocery supply agreements.

Woolworths said it was reviewing the ACCC claims and had been fully co-operating with the ACCC during the course of the investigation over the last year.

The proceedings follow long-running investigations by the ACCC into allegations that food and grocery suppliers have been treated unfairly by the major supermarket chains.

The case has been filed in the Federal Court in Sydney. The first directions hearing is set for February 1 2016 before Justice Yates.