Woolworths denies demanding 'Mind the Gap' payments was unconscionable

Woolworths has admitted tapping suppliers for extra payments after finding a $53 million hole in 2014 profits, but says its demands were consistent with the "ordinary nature" of retailer and supplier relationships.

Australia's largest retailer has denied allegations by the Australian Competition and Consumer Commission it acted unconscionably by demanding payments it was not entitled to and by taking advantage of it's superior market power to try to force hundreds of suppliers to pay more than $60 million in extra payments.

Woolworths same-store food and liquor sales fell for the fourth consecutive quarter.
Woolworths same-store food and liquor sales fell for the fourth consecutive quarter.  Photo: Bloomberg

In documents filed in the Federal Court on Tuesday, Woolworths denied it had contravened Australian Consumer Law and suggested Section 21 of the law did not apply as some of the suppliers were listed public companies.

The ACCC launched proceedings in December 2015, alleging that in December 2014 Woolworths developed a strategy, approved by senior management, to urgently reduce a $53 million short-fall in its first-half gross profits.

Suppliers who refused to pay were seen as not 'supporting' Woolworths.
Suppliers who refused to pay were seen as not 'supporting' Woolworths. 

Woolworths sought to reduce the shortfall by coming up with a scheme dubbed "Mind the Gap", whereby it systematically sought to obtain payments from a group of 821 suppliers.

Woolworths' category managers and buyers contacted suppliers and asked for Mind the Gap payments above and beyond payments outlined in supply agreements, giving them four days to pay. Those who refused were seen as not "supporting" Woolworths and Woolworths, in turn, threatened to stop supporting those suppliers.

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In its defence, Woolworths admitted that its price and trade investment team were asked by the Commercial Director of Supermarkets to identify ways to reduce the risk of a profit shortfall.

However, it claimed the Mind the Gap scheme was not "designed" by the price and investment team but drew upon practices used on previous occasions to improve terms with suppliers.

Using scripts that had been used in a previous program, category managers and buyers approached suppliers, using 'rules of the road' which required that discussions be based on well supported data, that buyers be 'polite and courteous' and not make unreasonable demands or threaten suppliers.

Woolworths admitted suppliers were not under pre-existing contractual obligations to make extra payments under the Mind the Gap scheme. However, it said its vendor trading terms contained a provision which allowed for cost reductions agreed between the retailer and suppliers.

"The making of payments by suppliers that are not prescribed in pre-existing contractual arrangements is an ordinary aspect of the trading relationship between suppliers and retailers," Woolworths said.

Further, 'the making of requests under the Mind the Gap program is consistent with the ordinary nature of the trading relationship between suppliers and retail supermarkets," it said.

Launching the case in December, ACCC chairman Rod Sims said if such demands were in line with industry practice, they needed to be stamped out.

Competition law experts say that to prove unconscionable conduct the ACCC has to prove that Woolworths' behaviour went beyond industry norms.

Also, the "smoking gun" may be the ACCC's claim that Woolworths did not keep accurate written records of which suppliers were approached because it knew suppliers were not getting anything in return for the extra payments.

In its defence, Woolworths said it did keep a written record of Mind the Gap payments in accordance with its usual procedures for recording payments, but did not keep separate records.

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