Woolworths to defend ACCC unconscionable conduct case

Sue Mitchell
Oct 31 2016
AFR
Woolworths will claim in court it did nothing wrong when it demanded more than $60 million cash from suppliers outside formal trading agreements to fill a $50 million hole in its 2014 profits.
After winning a stoush last month with its former hardware partner Lowe’s over the sale of Masters, Woolworths returns to the Federal Court on Monday, this time to defend allegations by the Australian Competition and Consumer Commission that it acted unconscionably by demanding extra payments from suppliers in the run up to Christmas two years ago.
The ACCC launched the proceedings in December 2015, alleging that Woolworths developed a strategy, approved by senior management, to reduce a $50 million short-fall in its first-half gross profits.
The ACCC has alleged that Woolworths sought to overcome the shortfall by coming up with a scheme dubbed “Mind the Gap”, whereby it systematically sought to obtain as much as $60 million from a group of “Tier B” suppliers.
Woolworths’ category managers and buyers contacted suppliers and asked for Mind the Gap payments above and beyond payments outlined in supply agreements, giving them four days to pay. Those who refused were seen as not “supporting” Woolworths and Woolworths in turn threatened to stop supporting those suppliers.
The retail giant has admitted tapping suppliers for extra money after finding a hole in profits but says its demands were consistent with the “ordinary nature” of retailer and supplier relationships and common practice.
Woolworths has also rejected the ACCC’s claim that it took advantage of its superior market power to put pressure on suppliers, saying many of the Tier B suppliers approached were large multinationals.
It also claims payments were only requested from suppliers whose products underperformed – delivering weaker than expected gross profits – or who had cut back on trade spend such as rebates or marketing support.
Woolworths is expected to call past and current senior executives, including the so-called architect of the scheme, its former commercial director Alex Dower, a former Tesco executive, to back its claim the payment demands were in order.
It is understood that the ACCC will not be calling suppliers as witnesses and will be relying on documentation and emailed communications between Woolworths and suppliers to support its case.
In a similar unconscionable conduct case against Coles, which was eventually settled in December 2014, the ACCC called six suppliers as witnesses.
Analysts and investors have urged Woolworths’ new chief executive Brad Banducci, who has been extracting the retailer from several past mistakes, exiting hardware, reducing grocery prices, rejigging its loyalty scheme and rebuilding bridges with suppliers, to settle the case and remove an unwanted distraction.
However, announcing better than expected September-quarter supermarket sales on Friday, Mr Banducci said: “We think we have a fair case, it will be for the court to decide.”
If the court finds against Woolworths the retailer faces fines of up to $30 million and may have to refund the $18 million it successfully extracted from suppliers. The ACCC is also seeking injunctions to prevent Woolworths from engaging in similar behaviour in the future – potentially removing a source of earnings.
Coles denied similar unconscionable conduct allegations by the ACCC but finally admitted to the claims in December 2014, agreeing to pay penalties of $11 million and refund payments to suppliers.
One senior competition and consumer lawyer, who declined to be named, said Woolworths’ conduct appeared less serious than that engaged in by Coles.
“But both supermarkets allegedly designed and adopted a strategy to reduce profit gaps by requesting payments where there was no entitlement to do so under existing contracts and used scripts to to ask suppliers for payments,” the lawyer said.
“Although there are some differences between Coles’ conduct and the allegations made against Woolworths (including the shorter period of time over which the conduct occurred and the lack of false representations or real ‘pressure’ placed on suppliers), the nature of the conduct was very similar to Coles, where the court ultimately found that Coles demands were ‘deliberate, orchestrated and relentless’,” he said.
Woolworths’ refusal to accept any wrongdoing could lead to higher penalties, he said.
The case commences on Monday before Justice David Yates and is expected to run for four or five days.
Read more: http://www.afr.com/business/retail/woolworths-to-defend-accc-unconscionable-conduct-case-20161028-gsddmd#ixzz4ObGafueI