ACCC finally acts on Coles ‘unconscionable conduct’ allegations

THE Australian Competition and Consumer Commission (ACCC) instituted proceedings against retailing giant Coles in the Federal Court of Australia on May 5, in a protracted reaction to allegations of unreasonable dealings with some of its suppliers that emerged from media reports – predominantly on the ABC – as far back as 2011. 

Suppliers including agribusiness and manufacturing businesses had earlier been reluctant to speak out officially, fearing negative repercussions to their trade, and this is believed to have delayed the ACCC’s action.

The ACCC took its court action against Coles Supermarkets Australia Pty Ltd and Grocery Holdings Pty Ltd (together, Coles) alleging that Coles engaged in unconscionable conduct in relation to 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 is alleged 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. 

ACCC’s investigations showed 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.

This, for its smaller suppliers, was the sum of a percentage which Coles asserted was referable 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”. 

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 to agree to pay the rebate. 

The ACCC alleged Coles had 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,” ACCC Chairman Rod Sims said.

“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,” Mr 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. 

“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.”  

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

The ACCC said the proceedings arose from a broader investigation by the ACCC into allegations that supermarket suppliers were being treated inappropriately by the major supermarket chains. The ACCC said a broader investigation is continuing, not ruling out action against other supermarket groups.

The ACCC v Coles matter is listed for a directions hearing in Melbourne on June 6, 2014.

www.accc.gov.au

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, ensuring the ACCC would seek to protect and maintain that confidentiality. This resulted in around 50 market participants approaching the ACCC on a confidential basis to discuss practices by the major supermarket chains they were concerned about. Having identified areas of concern, the ACCC then commenced an in-depth investigation into those issues.
February 13, 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.

 

Posted May 7, 2014.

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