Woolworths disputes ACCC portrayal of its bargaining power in unconscionable conduct case

IT MAY lay claim to more than a third of national grocery sales, but Woolworths claims it is far less powerful than you might think.

WOOLWORTHS’ bargaining might has come under the microscope in the retail giant’s unconscionable conduct proceedings in the Federal Court.

The retailer is fighting what it calls a misunderstanding of the supermarket industry, while defending the consumer watchdog’s allegation that it abused its market power in a bid to extract $60 million in extra payments from suppliers.

Under the Mind the Gap scheme, designed to help plug a $50 million hole in Woolworths’ profits in the second half of 2014, buyers and category managers were instructed to approach 821 suppliers for “support” payments of between $4,291 and $1.4 million each, with a four day negotiation deadline.

The ACCC argues that the extra payments, which do not form part of supplier contracts, are part of an unethical and unconscionable scheme to boost profits.

But Woolworths insists it’s all part of normal business practice and insists that its bargaining position is far less powerful than portrayed.

‘NOT AN ORDINARY PROGRAM’

On Wednesday, Counsel for the ACCC Norman O’Bryan SC grilled James Tan, Woolworths’ former head of trade for packages and international food, on his sworn affidavit which stated that the Mind the Gap scheme was merely “the stuff of ordinary everyday negotiations”.

“In fact, this was the first time ever that a set of requests had been made simultaneously by the whole of Woolworths’ supermarket buying and category management and head of trade community of all suppliers shown in the opportunity reports?” Mr O’Bryan asked Mr Tan.

“Mind the Gap was not an ordinary every day negotiation between Woolworths buyers and suppliers, was it? ... It was the first time ever in your experience that such a program had been implemented and undertaken?”

“Yes,” Mr Tan responded, conceding: “It was not ordinary as a program.”

Asked if it was “the first time ever the whole buying community was sent out into the field simultaneously to undertake this exercise”, he replied: “Yes.”

INTERNAL CALCULATIONS

Woolworths, which managed to squeeze $18.1 million from about 200 suppliers through the scheme, says the payments were in line with normal industry practice.

The amounts asked for were calculated using four “lenses” referring to the suppliers’ performance: whether Woolworths’ gross profit margin in respect of the product had declined, whether a joint business plan was in place, whether the supplier’s coop and promotional spend had declined and whether Woolworths had achieved 20 basis points in its gross profit margin on selling the supplier’s products, for every 100 basis points in growth of the retailer’s sales.

The basis of these calculations was not revealed to the suppliers, who the court heard were expected to pay just 12 per cent of the amounts demanded— which the ACCC claims indicates that the demand was unreasonable.

CUSTOMERS AT STAKE

The ACCC argues that Woolworths intended or expected that suppliers would stump up the cash because a failure to do so “would or might jeopardise their ability to access customers through Woolworths Supermarkets”.

Mr O’Bryan referred to an email by a Woolworths buyer to a representative of Manassen Foods, which supplies the retailer with baked, seafood and dairy products including Laughing Cow and Babybel cheese.

He said the results for the relevant product showed that its sales had effected a gross profit increase of 9.4 per cent, questioning whether it was reasonable for Woolworths to ask for “anything at all from a supplier who had performed like this”, taking account of what the supplier had “already contributed to Woolworths’ sales and its profit”.

BARGAINING POWER

Woolworths, which at the time of the scheme lay claim to 37 to 39 per cent of national grocery sales, disputes the suggestion that it was in a far stronger bargaining position compared to suppliers.

In its opening submissions, the retailer argued that low customer loyalty meant that shoppers would go elsewhere if it did not stock particular products.

“If shoppers go to Woolworths and do not find the products they want to buy, they may switch their business elsewhere,” the retailer said, pointing out that many suppliers were selling products and brands that it “would consider necessary to be competitive”.

“In reality, Woolworths and its suppliers engage in ongoing negotiations regarding their respective commercial positions over time and the Mind the Gap program was simply one of such negotiations.”

During cross examinations, Mr O’Bryan brought up the retailer’s national vendor trading terms, wielding the form as evidence of Woolworths’ alleged superior bargaining power.

The trading terms state that suppliers “must supply and deliver the goods” once “we issue a purchase order to you”; but that Woolworths would remain “under no obligation to issue a purchase order”.

Woolworths maintains that its standard contract is the basis for ongoing negotiations with suppliers, with the overall cost of goods “constantly changing”.

“Typically, the negotiation of prices, quantities and the levels of supplier financial support occurs on an ad hoc, day-to-day basis,” the retailer said in its opening submissions.

‘PERFECTLY NORMAL’

Earlier, a former Woolworths director told the court that the practice of asking suppliers for support payments was “perfectly normal”.

The former commercial director of Woolworths, Alex Dower, told the court on Tuesday that Woolworths never demanded anything from its suppliers, but that “asks” of cash to address profit margin problems was “normal”.

Mr Dower said extra cash paid was simply part of “ongoing commercial negotiations”, which had been Woolworths’ practice for years.

The ACCC is seeking injunctions, including an order requiring the refund of $18.1 million, as well as a pecuniary penalty of up to $1.1 million, plus its costs.

Coles settled a similar case with the ACCC in late 2014, agreeing to pay more than $10 million in fines and refund more than $12 million to suppliers.

The hearing continues.

— With AAP

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