The Australian Competition and Consumer Commission (ACCC) has launched legal action against Woolworths Limited, alleging it engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers, in contravention of the Australian Consumer Law.
The ACCC alleges that in December 2014, Woolworths developed a strategy, approved by senior management, to urgently reduce Woolworths’ expected significant half year gross profit shortfall by December 31, 2014.
It is alleged that one of the ways Woolworths sought to reduce its expected profit shortfall was to design a scheme, referred to as “Mind the Gap”. It is alleged that under the scheme, Woolworths systematically sought to obtain payments from a group of 821 “Tier B” suppliers to its supermarket business.
The ACCC claims that, in accordance with the Mind the Gap scheme, Woolworths’ category managers and buyers contacted a large number of the Tier B suppliers and asked for Mind the Gap payments from those suppliers for amounts which included payments that ranged from $4,291 to $1.4 million, to “support” Woolworths. Not agreeing to a payment would be seen as not “supporting” Woolworths.
The watchdog also alleges that these requests were made in circumstances where Woolworths was in a substantially stronger bargaining position than the 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 a Mind the Gap payment from every targeted Tier B supplier.
The ACCC claims Woolworths sought $60.2 million in Mind the Gap payments from the Tier B suppliers, expecting that while many suppliers would refuse to make a payment, some suppliers would agree. It is alleged that Woolworths ultimately captured approximately $18.1 million from these suppliers.
“The ACCC alleges that Woolworths’ conduct in requesting the Mind the Gap payments was unconscionable in all the circumstances,” ACCC Chairman, Rod Sims, said.
“The alleged conduct by Woolworths came to the ACCC’s attention around the time when there was considerable publicity about the impending resolution of the ACCC’s Federal Court proceedings against Coles for engaging in unconscionable conduct against its suppliers,” Sims said.
“Of course, the allegations against Woolworths are separate and distinct from the Coles case.”
Responding to the allegations, Woolworths said it was reviewing the claims.
“Woolworths has been fully cooperating with the ACCC during the course of the investigation over the last year. We believe our conduct was consistent with Australian and international industry practice to engage regularly with suppliers over product and category performance,” the company said in a statement.
“Woolworths believes in working cooperatively with suppliers. Woolworths was the first major supermarket to agree to sign the Grocery Code of Conduct and is currently implementing the Code across its business.”
The Council of Small Business Australia (COSBOA) has welcomed the actions of the ACCC against Woolworths.
Peter Strong, CEO of COSBOA, said: “This action shows again what COSBOA, its members and many others have said for decades, the behaviour of the duopoly is destroying businesses, people and productivity. The fact that Australia finally has an ACCC that does its job and doesn’t tug the forelock to big business is a godsend to innovation.”
The ACCC is seeking injunctions, including an order requiring the full refund of the amounts paid by suppliers under the Mind the Gap scheme, a pecuniary penalty, a declaration, and costs.
It comes just days after the ACCC announced Woolworths had contacted suppliers clarifying the implementation of the Food and Grocery Code of Conduct. The ACCC said Woolworths and Aldi had written to their suppliers clarifying that they are able to negotiate the terms of their Grocery Supply Agreements (GSAs). The ACCC said Coles had also explained to suppliers how the supermarket is implementing the requirements under the code and clarified that it is prepared to negotiate GSA terms.
The matter has been filed in the Federal Court’s Sydney Registry. The first Directions Hearing is set for 1 February, 2016.