The former chief executive of a major supermarket supplier says Coles and Woolworths could be using the sensitive market information they demand from manufacturers to make their own private label products more successful.
In a practice the competition watchdog has vowed to keep an eye on, the two supermarket giants ask suppliers to justify wholesale price hikes by submitting detailed information about the cost of their raw materials and input expenses.
The pair refuse to accept the increase if the information does not match their own monitoring of commodity prices, as was the case last year when Coles knocked back price hikes on 58 Campbell Arnott's products, leading to a tense stand-off and dwindling supplies of Tim Tams on the retailer's shelves.
Suppliers are concerned that the arrangement gives sensitive market information to de facto competitors, because the supermarkets make home-brand products that compete side by side with their own, according to former Kellogg's Australia and New Zealand chief executive Jean-Yves Heude.
"When briefing their private-label manufacturers, [the supermarkets] would almost in all cases want the same product quality and specs as the top sellers, but 20 or 30 per cent cheaper," said Mr Heude, who now advises about 20 mostly small food and grocery suppliers on how to deal with supermarkets.
"So having any technical or financial information on your products can be a great help for them to find the right way to copy your products.
"This is jeopardising the competitiveness by disclosing sensitive information, and as such is a breach to the key principle of fair competition."
Australian consumers appear to be warming to the supermarkets' private-label products, with IBISWorld predicting their share of grocery sales to grow from 30 per cent now to 35 per cent by 2020.
Coles and Woolworths have issued new terms and conditions to their agreements with suppliers in light of the Food and Grocery Code of Conduct, which sets minimum standards for how retailers and wholesalers deal with each other.
They say the new agreements require them to only use sensitive information gathered from suppliers for the purpose for which it was disclosed.
Coles has told suppliers they can enter into confidentiality agreements and share the cost of appointing a third party to conduct the review if they are concerned about its security, while Woolworths recently separated its private-label and standard buying departments to try to avoid information being misused.
Coles' price adjustment system has worked in reverse, with the supermarket telling suppliers early in 2015 that falls in commodity prices should be reflected in lower wholesale costs.
"Coles will approach you to discuss the recovery of such costs where applicable," a copy of the supermarket's policy, effective April 2015, obtained by Fairfax Media says.
ACCC keeping watch
Australian Competition and Consumer Commission chairman Rod Sims said the watchdog has looked at the practice after concerns were raised in the past couple of years.
"This sort of behaviour can be anti-competitive but we haven't as yet been able to find sufficient evidence to take any action," Mr Sims said.
"You need more than just the sharing: we need to prove it's got a negative effect on competition."
Mr Sims said the ACCC would have a better chance to look at the behaviour under the code of conduct, and reiterated his advice to suppliers that they should not feel pressured into signing the new agreements.
The ACCC ended a case against the country's four biggest petrol retailers just before Christmas over the sharing of fuel price information every 15 to 30 minutes, arguing it could lessen competition.
Mr Heude said it would be difficult to know if the supermarkets were abiding by the new rules.
"If I know that you are buying an ingredient at $1 a kilogram, and I am buying it for $1.20, next time I've got a meeting with a supplier I'm going to seriously talk about pricing and ask him to charge me $1," he said.
"Through this whole process, they are clearly taking control. That's a very clear usage of their power. If the balance of power was more even, nobody would ever accept to [giving] any information. Manufacturers accept to do it only because they are scared."
Handing over the secret recipe
Mr Heude said the price adjustment process, introduced first by Coles in 2009 and later Woolworths, also involved suppliers showing what percentage of the total cost each ingredient represented, as well as what variety of ingredients were used – effectively spelling out a successful brand's "secret recipe" that the supermarkets could replicate in their private label version.
He said there had been a number of occasions in the past two years in which the supermarkets had knocked back a price increase from a manufacturer, only to increase the shelf price for the same product.
A Coles spokesman said: "As part of our commitment to lowering the cost of a weekly shop for our customers, Coles has requested suppliers justify requests for price increases for several years. Prior to Coles introducing this requirement, many suppliers would seek to raise prices every year – in some cases ahead of inflation or any increase in input costs."
"This focus on wholesale prices, along with driving efficiencies throughout our business, has enabled Coles to lower the average cost of a weekly shop every year for more than six years," he said.
A Woolworths spokesman said that it worked co-operatively with suppliers under the terms of the code of conduct to "keep prices down for our customers".
Next Monday will bring the first direction hearing in the case the ACCC has brought against Woolworths for unconscionable conduct, alleging it sought out $60.2 million in so-called "Mind the Gap" payments from 821 Tier B suppliers to cover a profit shortfall, of which $18.1 million was paid.