Woolworths’ horror year has been capped by legal action launched by the competition regulator yesterday for alleged unconscionable conduct over its dealings with suppliers a year ago to urgently reduce a half year profit shortfall for the six months to December, 2014.
Woolworths has already downgraded profits three times this year as sales and earnings from its core supermarkets business slowed and the hardware experiment called Masters swallowed more money.
That in turn has seen CEO, Grant O’Brien go (but he is still employed until next year to allow him to get superannuation benefits), along with former chair, Ralph Waters, as well as a couple of other directors and a string of senior executives.
The Australian Competition and Consumer Commission said late yesterday it had instituted proceedings in the Federal Court alleging Woolworths acted in contravention of the Australian Consumer Law.
The news was released around 8 minutes before trading ended and Woolies shares eased 0.9% to $23.37 – the shares rose slightly right at the end. they will react negatively today once investors have had the chance to read the detail of the ACCC”s claims which can be found here (http://www.accc.gov.au/media-release/accc-takes-action-against-woolworths-for-alleged-unconscionable-conduct-towards-supermarket-suppliers)
The ACCC alleges that in December 2014, Woolworths developed a strategy, approved by senior management, to urgently reduce Woolworths’ expected significant half year gross profit shortfall by December 31 of that year.
The ACCC alleges that Woolworths sought approximately $60.2 million in so-called "Mind the Gap" payments from the its Tier B suppliers, expecting that while many suppliers would refuse to make a payment, some suppliers would agree.
The Commission claims that Woolworths ultimately captured approximately $18.1 million from these suppliers and that that additional income flowed through to Woolworths’ gross profit.
The Commission further alleges that, in accordance with the Mind the Gap scheme, Woolworths’ category managers and buyers contacted a large number of the Tier B suppliers and asked for Mind the Gap payments from those suppliers for amounts which included payments that ranged from $4,291 to $1.4 million, to “support” Woolworths.
And the ACC says it was made clear by these managers that not agreeing to a payment would be seen as not “supporting” Woolworths.
The ACCC alleges that Woolworths’ conduct in requesting the Mind the Gap payments was unconscionable in all the circumstances,” ACCC Chairman Rod Sims said in yesterday’s statement.
“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,” he said.
“The alleged conduct by Woolworths came to the ACCC’s attention around the time when there was considerable publicity about the impending resolution of the ACCC’s Federal Court proceedings against Coles Supermarkets for engaging in unconscionable conduct against its suppliers,” Mr Sims said.
“Of course, the allegations against Woolworths are separate and distinct from the Coles case.”
The ACCC said it was seeking injunctions, including an order requiring the full refund of the amounts paid by suppliers under the Mind the Gap scheme, a pecuniary penalty, a declaration, and costs.
These proceedings follow broader investigations by the ACCC into allegations that supermarket suppliers were being treated inappropriately by the major supermarket chains. The matter has been filed in the Federal Court’s Sydney Registry. The first directions hearing is set for February 1 next year before Justice Yates.
Earlier this week the ACCC revealed Woolworths and Aldi had written to over 1000 suppliers clarifying that suppliers are able to negotiate terms of the grocery supply agreements following the ACCC’s concerns.
