Woolworths admits no legal or contractual basis for supplier payments

Woolworths admits it lacked legal basis for demanding millions in supplier payments, but says they were “not gifts”.

Willingness to continue to do business was not the only benefit from the payments, Woolworths said. Picture: AFP/ Peter Parks.

Woolworths has admitted it had no legal or contractual basis for asking suppliers for millions of dollars in cash payments at the end of 2014, but denied the money was a “gift” to the retail giant.

Woolworths’ former head of commercial for supermarkets, Alex Dower, said the “ask’’ for cash payments was part of “good ongoing commercial negotiations” between supplier and retailer.

The Australian Competition and Consumer Commission has launched Federal Court proceedings against Woolworths, alleging it engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers.

It has alleged that in December 2014, Woolworths developed a strategy, approved by senior management, to make up a shortfall in gross profit for the first half of 2014-15 by demanding $60.2 million of payments from those suppliers.

The “Mind the Gap” scheme targeted a group of 821 “Tier B” suppliers to its supermarket business, seeking payments of up to $1.4m to “support’’ Woolworths and giving them just days to pay.

Under questioning from Norman O’Bryan, counsel for the ACCC, Mr Dower agreed that Woolworths had no contractual or legal right to ask for the payments.

“What we are investing in here is a relationship. It’s a reconfirmation of the relationship,’’ Mr Dower told Justice David Yates.

He said that “willingness to continue to do business’’ was not the only benefit from the payments because it was part of a process that would help fix underperformance.

“No, absolutely not gifts,’’ Mr Dower said.

“Part of good ongoing commercial negotiations.’’

The court has heard that Woolworths expected that for every 1 per cent growth in sales from a supplier it would add 20 basis points, or 0.2 per cent, to the gross profit margin achieved across sales of the product.

Woolworths drew up a spreadsheet of suppliers measuring four “lenses’’ including sales growth and sales-to-gross-profit and approached suppliers who had failed to meet the target of profit growth for payments.

He told the court that 40 per cent of supermarket sales were “on promotion’’, which meant that the profit margin of the retailer changed every day.

The court heard on Monday that retailers including Mondelez, Johnson & Johnson and Primo Small Goods objected to the payments because they were retrospective, did not provide a mutual benefit or were too late.

Mr Dower, a former supplier with confectioner Mars who left Woolworths in February 2015, denied that the $18.2m the retailer received from the “Mind the Gap’’ program dropped straight to the bottom line, arguing that it while it increased gross profit, other expenses such as labour and storage had to be taken out.

He said that there were examples “every day’’ of suppliers making similar requests for support from retailer, such as Coca Cola asking Woolworths to buy a lot of product at the end of a half or full financial year, with Woolworths agreeing to the purchase and the storage costs because of the relationship.

But he could not give examples of cash payments such as those in the Mind the Gap scheme flowing the other way, from Woolworths to a supplier.

Earlier, counsel for Woolworths Cameron Moore told the court that the Mind the Gap payments were part of a continuous program to manage costs, sales and profits and the retailer would be “downright foolish’’ not to do so.

He said suppliers regularly contributed to the cost of promotions and discounts for products, and that when they did not it increased the cost to Woolworths.

Rather than a unique program it was just asking buyers to address issues in their business, such as declining gross profit margins, and the purpose of the Mind The Gap program was to have a focused and organised process for that.

The hearing continues.