Coles hits back at the ACCC's price check

The details of Coles' defence against the ACCC show how hard the regulator will have to work in this case… and with stakes so high, losing will be a terrifying prospect for both parties.

Coles’ defence against claims by the Australian Competition and Consumer Commission that it acted unconscionably towards its suppliers makes it very clear that it isn’t going to roll over meekly. It also outlines the strategy its legal team will employ.

The defence, filed with the Federal Court late on Monday, is in response to the action initiated  by the commission in May, when it started proceedings against Coles alleging unconscionable conduct in relation to what Coles’ called its “Active Retail Collaboration” program.

Under the ARC program Coles asked its suppliers for rebates or discounts in return for giving them access to a data-sharing portal which, because it would lead to more economic and efficient ordering by Coles, was supposed to reduce the suppliers’ production costs, reduce waste and administration costs and transport costs.

Coles would also give them access to forward planning information, including nine-week sales forecasts and access to a 35-day order plan. It would commit to planning promotions at least six weeks in advance, wouldn’t change those plans within the six weeks and would provide 12 weeks’ notice of an intention to stop acquiring a particular product from the supplier. It also committed to ordering “economically efficient” quantities of product, optimising the suppliers’ supply chain costs even though it could increase Coles’ own inventory costs.

Coles’ position is that the program represented a sharing of the benefits the suppliers would receive from the ARC program, which was developed after it had spent more than $1 billion improving its supply chain.

The ACCC has alleged that ARC was a strategy by which Coles wanted to improve its earnings by extracting better trading terms from its suppliers and that to achieve its objective it provided them with misleading information about the savings they would achieve; used undue influence, pressure and unfair tactics to gain the rebates; gained advantage by using its superior bargaining position to seek payments where there was no legitimate basis for them and didn’t give the smaller suppliers sufficient time to assess the value, if any, of the ARC program.

It claimed Coles had imposed penalties on suppliers, threatened to remove their products from its shelves if they didn’t participate in the program, had failed to pay them agreed prices and had discriminated against them in favour of its home brand products.

In early 2011 Coles had engaged Boston Consulting to work on its supply chain and to achieve a cost savings and earnings program. It was from that work that the ARC program was developed.

The ACCC’s case is based on the treatment of the smaller, or “tier 3” suppliers. Before Coles began negotiations with them, however, it piloted the program with its largest suppliers, including Nestle, General Mills and Procter & Gamble in negotiations in May and June 2011 that took at least six weeks. Between November that year and February 2012 all three agreed to participate, with Procter & Gamble contributing 0.45 per cent of the cost of goods sold to Coles through rebates or discounts, General Mills 0.6 per cent and Nestle $208,000 a month.

Based on the progress of the negotiations with its biggest suppliers, Coles believed it had a reasonable basis for expecting the ARC program would deliver benefits to all of its suppliers and so it widened the negotiations to include another 50 of its larger suppliers and then, in October 2011, “invited” another 200 smaller suppliers – the tier 3 suppliers – to join the program, holding supplier forums to explain ARC to them.

From mid-October its category managers, armed with scripts, began making “direct asks” of the individual suppliers, with the negotiations to be escalated to include more senior managers if thought necessary to achieve an agreement. The program was targeting $16 million of revenue from the tier 3 suppliers, or roughly one per cent of their cost of goods.

Coles’ general manager for Grocery and Frozen, Richard Pearson, was called into “fewer than seven” negotiations and its then merchandise director – and now managing director – John Durkan, fewer than three times. Of Pearson’s seven, Coles says only one agreed to participate, while Durkan had no success at all – but Coles continued to trade with them anyway.

In fact, the 32 suppliers (out of the 200 tier 3 suppliers approached) who declined to participate in the program all still trade with Coles, albeit without access to its supplier portal and the claimed benefits that is said to generate.

So, Coles is arguing that the program involved real benefit to the suppliers; that the benefits were created by its investment in its supply chain and therefore it was entitled to a share of them; that the negotiations with the big suppliers demonstrated the benefits were perceived as real by them; that the program was voluntary and that the vast majority of the contact with the smaller suppliers was by the category managers rather than senior executives.

That latter point may be important, given that the case law suggests it isn’t possible to make a case of unconscionable conduct against a company by simply looking at the conduct of its employees – there has to be some direction and system to the conduct.

In its defence Coles claims Durkan directed his general managers in November 2011 to ensure the ARC program was being implemented “in the right way” and to reiterate to the “team” that no sanctions were to be imposed or threatened on any tier 3 supplier that didn’t support the ARC program. It also claims he said that, while the suppliers wouldn’t receive its benefits, Coles would still trade strongly with them.

It would appear evident from the time it took to convince some suppliers – large and small – to sign up to the program that the negotiations were at least robust. It is also apparent that those who declined to join weren’t going to have access to the information sharing or the “economically efficient quantities” approach to orders that the program participants would receive.

It isn’t enough, however, for the negotiations to be robust for the conduct to be deemed unconscionable. It has to be something significantly more than unfair or tough, which is the norm in hard commercial negotiations. It has to be unconscionable.

If the courts ultimately deem Coles' behaviour unconscionable, it and Durkan and others will suffer major and costly damage, both financial and reputational. If the ACCC’s case were to fail, it would add embarrassingly to its list of recent litigation failures. The stakes are substantial.

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