Coles is in the ACCC’s firing line this morning after it was alleged the supermarket giant — which also sells a growing range of electronics and appliances — was placing undue pressure on smaller suppliers to agree to rebates on goods purchased at wholesale and then sold at retail.
The ACCC instituted proceedings against Coles today in Federal Court, after an extensive 3-year investigation into the matter, which included confidential submissions from 50 suppliers.
In addition to the margin between a wholesale price and a retail price, which is the traditional method of profiting in the retail industry, retailers also charge rebates on suppliers, in the form of a percentage of the wholesale price, which vary from retailer to retailer and supplier to supplier. The more powerful the retailer in a certain industry, the more pressure it can normally apply to suppliers to agree to a rebate. These rebates are often explained as being used to fund marketing, especially catalogue advertising.
Suppliers can also use rebates as a way of offering more profitability to one retailer instead of another. For example, the wholesale price for Retailer A and Retailer B could be the same, implying an equal level of profitability (assuming both retailers sell the product at RRP), but if one has a more favourable rebate, it means they are making more profit from each sale, unbeknownst to the other retailer.
The ACCC has alleged that in 2011, Coles sought to raise $16 million through renegotiated rebates with what the ACCC calls ‘200 smaller suppliers’. Coles contacted these suppliers through its product sourcing web portal, the ACCC says, demanding they agree to the terms within a few days of contact. Those that didn’t agree were threatened with adverse consequences, the ACCC alleges.
“If these suppliers declined to agree to pay the rebate, Coles personnel were allegedly instructed to escalate the matter to more senior staff, and to threaten commercial consequences if the supplier did not agree,” said an ACCC spokesperson. “The ACCC alleges that, in a number of cases, threats were made when suppliers declined to agree to pay the rebate.”
In the ACCC’s detailing of its allegation, it says that Coles based its rebate demands on how much it believed the suppliers could afford to pay, based on the supermarket’s order size with the supplier. Although not explicitly stated, the ACCC strongly hints that when approaching these small suppliers, Coles made suggestions that not agreeing to the rebate would lead to reduced or complete de-ranging, which would lead to the supplier facing a tremulous future:
Coles was ultimately seeking an ongoing ARC rebate in the form of a percentage of the price it paid for the Supplier’s grocery products, which, for its smaller suppliers, was the sum of a percentage which Coles asserted was referable to the value to the supplier of being able to access the Coles supplier portal and, where applicable, a percentage based on the asserted value to the supplier for Coles having changed its ordering patterns to order products in “economic order quantities”.
In its allegations against Coles, the ACCC includes a point that is likely to gain the attention of both suppliers and retailers in the appliance industry:
“The ACCC alleges that Coles has engaged in unconscionable conduct towards 200 of its smaller suppliers, in breach of the ACL by…taking advantage of its superior bargaining position by, amongst other things, seeking payments when it had no legitimate basis for seeking them.”
It is an open secret in the appliance industry that suppliers are not happy with the enormous power wielded by retailers, including the demands for rebates to be paid. Suppliers privately fume about the constant demands being placed on them for marketing, training and catalogue support, as well as the need to fund retailer conferences.
ACCC chairman Rod Sims was adamant that he had the support of the Australian public in pursuing this case and attempting to regulate the retailer rebate relationship.
“The conduct of Coles alleged by the ACCC in these proceedings was capable of causing significant detriment to small suppliers’ businesses,” he said. “This could have resulted in these businesses becoming less able to plan and less able to innovate in the market, with resulting reduced economic efficiency and consumer detriment.”
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