Woolworths is being taken to court for attempting to plug a profit shortfall by extracting more than $18 million in payments from hundreds of suppliers.
The Australian Competition and Consumer Commission (ACCC) has instituted proceedings in the Federal Court against Woolworths, alleging it engaged in unconscionable conduct in dealings with suppliers over its “Mind the Gap” scheme.
In December 2014, Woolworths developed a strategy, which was approved by its senior management, to urgently reduce Woolworths’ expected significant half year gross profit shortfall by 31 December 2014, according to the ACCC.
This decision was taken around the time its rival Coles was being fined $10 million in the Federal Court over unconscionable conduct in its dealings with its suppliers back in 2011.
One of the ways Woolworths allegedly sought these payments was to design a scheme, referred to as “Mind the Gap”, which saw Woolworths systematically try to obtain payments from a group of 821 “Tier B” suppliers to its supermarket business.
According to the ACCC, this involved Woolworths’ category managers and buyers contacting a large number of the Tier B suppliers to ask for Mind the Gap payments ranging from $4,291 to $1.4m, to “support” Woolworths. Not agreeing to a payment would be seen as not “supporting” Woolworths.
The ACCC 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 payment.
According to the ACCC, Woolworths sought approximately $60.2m in Mind the Gap payments from the Tier B suppliers, knowing that many suppliers would refuse to make a payment, and some suppliers would agree.
It is alleged that Woolworths ultimately extracted $18.1m 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.
“A common concern raised by suppliers relates to arbitrary claims for payments outside of trading terms by major supermarket retailers. It is difficult for suppliers to plan and budget for the operation of their businesses if they are subject to such ad hoc requests,” Sims said.
Sims noted that the issue came to the ACCC’s attention as it wrapped up its Federal Court proceedings against Coles for engaging in unconscionable conduct against its suppliers.
In 2013, Woolworths agreed to a Food and Grocery Industry Code of Conduct that aimed to establish a clear set of principles relating to key aspects of trading relationships between retailers and suppliers.
The Code was tabled in Parliament in March this year, making it enforceable.
Woolworths said it was reviewing the ACCC 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.
"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."
