Metcash, Tesco accused of bullying suppliers

First it was Coles, then Woolworths; now Metcash and Tesco face allegations of mistreatment of suppliers. But they're only doing what the free market obliges them to do.

It’s almost becoming a badge of honour for supermarkets. First we had Coles paying $10m to settle with the ACCC for unconscionable conduct towards suppliers; then we had the ACCC following up on similar allegations against Woolworths. Now lowly Metcash is getting in on the act, with claims it demanded suppliers pay rebates of up to 69% of sales, and even pay for Metcash staff to take overseas business class trips. Meanwhile, in the UK, the new ‘Groceries Code Adjudicator’ is joining the Financial Reporting Council and the Serious Fraud Office in investigating the beleaguered Tesco over claims of the mistreatment of suppliers.

But accusing a company of being ‘unconscionable’ is like accusing a pig of being greedy. Companies don’t have a conscience; they’re run by people who might have, of course, but their jobs and livelihoods may depend on them maximising profits. At the top of the tree, company directors actually have a legal obligation to maximise profits for shareholders, and you can’t go telling people to be only a bit greedy.

Left unfettered the free market will produce monopolies that gouge their suppliers and customers. The only way to protect people is to keep power from becoming concentrated in the first place, to maintain effective competition at all stages of a supply chain.

Unfortunately, it’s already gone too far with the supermarkets. Even in the supposedly highly competitive UK supermarket sector, in its annus horribilis, Tesco is likely to make a return on capital of around 6% this year, from which it is expected to slowly rebuild. The downtrodden Metcash will likely make around 13%. These are numbers that would make many of their suppliers weep; one can only imagine what they’d make of Woolworths’ 27%.

The only way to solve the problem would be to split Woolworths and Coles apart, but there will never be the political will to do that. So we’ll be left with them pushing the boundaries of ambiguous competition law and codes of conduct.

In the meantime, for investors, the woeful position of suppliers and the supreme position of Woolies and Coles is laid bare by a simple Porter analysis – and the smart money will continue to back the winners.

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