Why the ACCC is hounding Coles

The supermarket giants are fending off attack after attack over their alleged rough handling of suppliers, but former Coles boss Ian McLeod may well be proven right when he says the retailer will be "vindicated" in the latest court case launched by the competition regulator. And that's an unnerving prospect.

The problem with taking an unconscionable conduct case against Coles is how difficult it will be to win, simply because the relevant provisions in the Competition and Consumer Act poorly define what ‘unconscionable conduct' is. Instead, it's left to the courts to make a moral judgement in the circumstances of each case. And to date the ACCC has had very limited success with it.

Suppliers are well versed in how difficult it is to win such cases. The federal government's green paper on agricultural competitiveness, released yesterday, had an entire section dedicated to competition and regulation in the industry.

Among the issues raised by stakeholders was the need to strengthen competition laws to make it easier to prove misuse of market power and increase the penalties for breaching the Competition and Consumer Act.

Whatever the outcome, this latest development highlights why Australia desperately needs a food and grocery code of conduct with actual clout, not the flimsy voluntary code the government's considering.

McLeod told The Australian yesterday that discussions with suppliers over payment for goods were part of “the usual negotiations between Coles and suppliers, and that Coles was only asking for money it was entitled to”. Rod Sims obviously disagrees.

Both Coles and Woolworths have previously argued that their tactics to squeeze prices are due to increased competition in the market. And consumers have benefited, at least in the short term, from the resulting grocery price deflation. But over the long term, putting the squeeze on suppliers can reduce innovation and force more out of business, resulting in less choice and ultimately higher prices for the consumer.

The supermarket giants know that as it stands, their days of squeezing suppliers are numbered. That's why last year they, along with the Australian Food and Grocery Council, put forward the new voluntary Food and Grocery Code of Conduct.

The code was first flagged as a means of delivering greater transparency and certainty for suppliers in relation to the supply terms agreed with retailers, although it will only come into effect once regulations have been made under the Competition and Consumer Act.

It basically says, among other things, that retailers can't ask suppliers to pay for shrinkage (shoplifting) or wastage. It sounds like a great idea, on paper at least.

The problem is that the code allows for ‘opt-outs' to the rules. In effect, retailers could just ask suppliers to agree to exemptions that would otherwise be prohibited.

So Coles and Woolworths would be able to ask suppliers to pay for wastage or shrinkage, as long as it was specified in their contract.

Suppliers would, of course, have the option to refuse, but there aren't many who would take on a duopoly controlling 70 per cent of the market.

To critics, the code is simply a way of Coles and Woolworths carrying on as normal, and with much less scrutiny from the ACCC.

That's why Rod Sims is gunning for Coles now, and why he may go after Woolworths in the near future: once the voluntary code is brought in, it'll be much harder for Sims to bring unconscionable conduct and misuse of market power cases against the supermarket giants, because the suppliers will have agreed to unfavourable terms laid out in the contracts.

Consultation on the draft code recently closed, but these issues must be addressed before the government makes the necessary regulations.

Coles and Woolworths won't stop squeezing suppliers unless there are consequences more serious than mediation, arbitration and injunctions.

Suppliers want a much tougher code that includes financial sanctions for breaches, as was brought in recently in the UK.