ACCC chief Rod Sims hauls Coles to court for squeezing suppliers

THE ACCC has basically taken the step of branding Coles’ dealings with some suppliers as immoral.

Former Coles boss Ian McLeod with a farmer. Artwork: Sturt Krygsman.

THE Australian Competition and Consumer Commission, in taking a high-risk unconscionable conduct case against Coles, has basically taken the unprecedented step of branding the supermarket chain’s dealings with some suppliers as immoral.

It is one of a string of actions against Coles and industry rival Woolworths in which the competition regulator has thrown the book at the industry. If successful, this action will set clear precedents for all big business in dealing with small business suppliers.

The ACCC is hoping to set precedents and clear rules around ­unconscionable conduct, a notoriously uncertain legal area. The courts have made clear that to win the actions in so-called business-to-business dealings there has to be some “moral taint” or “unethical or immoral conduct.”

The actions cast a cloud over the regime of former Coles boss Ian McLeod and will be a distraction for his replacement John Durkan.

On this occasion, the ACCC alleges Coles had regular days to cover “profit gaps” where suppliers would be pressured to make up shortfalls.

There were five suppliers identified, including broom manufacturer Oates — which was pressured to pay a “profit gap” of $326,500 after Coles had earlier allegedly dropped $200,000 in a failed promotion in which it was selling items below cost.

The campaign was allegedly instituted without talking to Oates.

Also involved were frozen food suppliers Colonial Farm and Bayview Seafoods and air freshener producer Austech.

Three years ago, when Rod Sims first started at the ACCC, he was flooded with complaints against the supermarkets and he called for complaints on a confidential basis to assess their veracity. The companies involved in this matter were uncovered through later, compulsory discovery processes so none of the above were volunteering their information.

Coles noted that all remained suppliers to the supermarket chain.

The allegation is that if they couldn’t sell through Coles they wouldn’t have a business.

The ACCC supermarket campaign has covered everything from allegedly being part of a laundry detergent cartel, misuse of market power in the shopper docket cases, and misleading advertising and price signalling in the Informed Sources case amid a flurry of merger and acquisition investigations into the industry’s expansion through individual shop purchases.

Ironically the sector has never been more competitive and arguably prices have fallen accordingly, benefiting consumers.

The industry also has a high political profile and has been at the centre of the small business lobby’s concerns and complaints.

Amid all this, ACCC chief Sims has unashamedly gone on the offensive, arguing to do otherwise would be failing to do his job.

He rejects out of hand any suggestion his actions have been politically motivated and argues the substance of the complaints were such he had no choice but to take action.

Immediate consumer windfalls are impossible to find, but the argument is that if Coles maintained such alleged conduct then small business suppliers would themselves go out of business and stop innovating. That is a tougher argument to prove in court.

In this case, he argues Coles’s alleged conduct “was contrary to the prevailing business and social value which underpin business standards that apply to dealings with suppliers”. What concerned Sims was alleged attempts by Coles to recover money from suppliers after complaining its own sales were not successful and supplies were late or damaged.

The courts have held in the Lux case that bargaining power is not always equal, so the behaviour involved must be out of the normal course of business and unreasonable, which is what is alleged in this case.

Coles has rejected the allegations and will fight the matter before Federal Court judge Michelle Gordon, who is also presiding over the Coles ARC case.

In the matter filed earlier this year, the ACCC alleged Coles pressured suppliers into extra payments to cover the cost of supply chain revamps. Coles may well ­attempt to have the matters run together, but this will be up to Justice Gordon. The ACCC is using its consumer law powers rather than one of the competition provisions for the simple reason that there is no immediate anti-competitive purpose.

Boral hits brick wall

THE big question now for Boral’s Mike Kane is whether the land housing his brick operations is worth more for development purposes than the brick plants.

As expected the ACCC, after six months of deliberations, yesterday made it clear it will reject the proposed CSR-Boral brick joint venture.

The statement of issues said: “The ACCC’s preliminary view is that the proposed joint venture is likely to substantially lessen competition in the NSW and Queensland markets for the supply of clay bricks.”

Today the ACCC is also expected to issue another statement of issues, this time questioning the Rheem-Dux water heater merger — where the argument will be over the level of competition in the industry.

The Boral statement was as definitive as you will get from the competition regulator and more so when you consider that in reaching this conclusion, it comprehensively rejected the argument that bricks are going out of favour and hence substitute products are available. Brick production peaked in 1981 and since then, according to the proposed joint venturers, brick’s share of the cladding market has fallen by 48 per cent and of the detached housing market by 41 per cent.

This argument didn’t convince the ACCC nor did the implied threat that Boral would walk from the industry.

The decision sent both companies stock prices down in an up market, with Boral down 1.4 per cent at $4.89 a share and CSR down 0.3 per cent at $3.66 a share.

The proposed joint venture deal reached in March this year, with CSR controlling 60 per cent, was widely seen as being Kane’s way to gracefully exit an industry he didn’t like.

Kane still likes bricks in the US but not Australia, and at some point the land on which his plants are based will be worth more for land value than for housing brick plants.

If Kane does follow through with threats to quit then obviously the endgame will be the same, with just two brick makers on the east coast of Australia as opposed to three now.

The difference is CSR would not be able to simply rationalise the two operations.

The competition law deals with agreements to acquire plant, equipment or companies and the ACCC must knock them back if it thinks competition will be substantially reduced.

That is the view it has taken here and legally it would seem Boral and CSR have little room to move.

The ACCC will consider responses to its statement of issues but its definitive nature suggests the companies have little hope of talking the regulator around on this issue.

They could seek a declaration in the Federal Court, or just take the threatened commercial action. Boral’s Kane is already in the process of gradually exiting the local cement industry and maybe bricks will be next to go once he has sold his roof tile assets.

But none of this comes into the ACCC’s reasoning on the merger issue.