ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405

The ACCC recently won a resounding victory against Coles in an action for statutory unconscionability. Coles is one of the two large supermarket retailers in Australia. Now the ACCC’s sights are set on the other large retailer: Woolworths.

The Parties and the Law

On 5 May 2014 the ACCC launched proceedings in the Melbourne Registry of the Federal Court against Coles. Coles is one of the two large ‘big-box’ supermarket retailers in Australia. The other is Woolworths. Depending on the method of calculation, Coles and Woolworths have a combined market share of between 60-80 percent.

The ACCC’s action was based on the then s 22 of the Australian Consumer Law, which prohibits a corporation from acting unconscionably in all the circumstances in the acquisition, or possible acquisition, of goods from another person (that is not a listed company).

The case was a consolidation of two proceedings, both founded on allegations, at base, that Coles improperly demanded payments from its upstream suppliers.

The ARC Proceeding

The first proceeding involved the allegation that Coles demanded payments from its Tier 3 suppliers under its Active Retail Collaboration (ARC) scheme.

The ARC scheme was a scheme to harness IT to improve the efficiency of its supply chain: classic ‘time-and-motion’ innovation beloved of management consultants. The need to constantly innovate supply chain efficiencies is driven by competition among supermarkets for the marginal dollar of the shopper. Supply chain efficiencies benefit both supermarkets and suppliers. The challenge is getting suppliers to contribute to the costs of improved efficiencies of which they share in the benefit, when any particular supplier has an incentive to free ride.

Coles divided suppliers into three categories according to size, and Tier 3 contained the smallest suppliers. Supply agreements are with individual suppliers, and, in the supermarket industry, such agreements generally contain elaborate rebate provisions.

In late 2011, Coles sought to incorporate an ARC rebate into Tier 3 suppliers’ supply agreements. The ARC rebate was calculated as a percentage of the price Coles paid the supplier for the supplied goods, and was deducted from the amount Coles owed the supplier in payment for the supplied goods.

Getting Tier 3 suppliers to agree to the inclusion of the ARC rebate involved a coordinated campaign on the part of Coles of ruthless negotiation, inducements and threats of discontinuance of supply. The need to minimize transaction costs in the face of a large-numbers bargaining scenario meant that an average rebate was offered to all Tier 3 suppliers, without being tailored to their individual needs or benefit.

The Claims Proceeding

The second proceeding involved the allegation that Coles demanded payments from five suppliers outside the terms of the supply agreements it had with them. The payments were for ‘profit gaps’ (after unilateral decisions by Coles to discount a supplier’s product), waste (lost or damaged products within-store), and mark-downs and short or long deliveries (in an industry where timing is critical). Again, demanded payments were deducted by Coles from monies Coles owed those suppliers for goods already supplied.

The Settlement

Eight months after proceedings were launched, Coles submitted to settlement entirely on the ACCC’s terms. Coles undertook, pursuant to s 87B of the Competition and Consumer Act 2010 (the CCA), that it would establish a scheme to repay the amounts it had improperly demanded from suppliers. Pursuant to s 224 of the CCA, pecuniary penalties of $10m were imposed for both proceedings ($3.7m for the ARC proceeding and $6.3m for the Claims proceeding). Coles was ordered to pay the ACCC’s costs of $1.25m.

Gordon J stated at [2] that “Coles’ conduct was of a kind which merits severe penalty. But for Coles making the admissions it has now made and acknowledging the gravity of its contravening conduct, the conduct and circumstances in which it was committed would have warranted imposing penalties at or close to the maximum the law permits.”

Analysis

The Australian Consumer Law is Schedule 2 of the CCA. Section 2 of the CCA (the object clause) states that “[t]he object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading . . . ”.

Just as only efficiency-enhancing competition is protected by the CCA (Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 35), so only efficiency-reducing unfair trading ought to be prosecuted under the CCA. In the sub-field of welfare economics, the transfer of money from one person to another is efficiency-neutral. Payments demanded of suppliers by supermarkets are in turn competed away amongst supermarkets, to the benefit of the final consumer. The seeking of injunctive or declarative relief in administrative law does not appear to have been part of the litigation, and Australia does not have a culture of pro-consumer bodies intervening, even as amicus, on behalf of consumers.

News reports (opens in new window) suggested that Wesfarmers, owner of Coles, settled the case because of perceived mounting reputational damage to the Coles brand.

Many of Coles’ practices in demanding payments “shock the conscience” only in the absence of rigorous economic analysis. The early engagement of overseas experts in ‘vertical economics’ can provide both the case-theory and the PR ammunition to neutralize the ‘optics’ problem in any settlement negotiations with a competition regulator. Theories of asymmetric information, relational contracting, large-numbers bargaining, transaction-cost minimization and Ramsey pricing/taxation would all have been relevant in creating a narrative explaining the efficiency-enhancing properties of many of those actions which were otherwise said to be inconsistent with acceptable business practice and social norms. It would also make future cases conformant with developments in the theory of economics and business of the last 30 years, developments relied upon by the global management consulting firms which advise supermarket companies world-wide on supply-chain efficiency.

Next Step

The ACCC appears now to be training its statutory unconscionability sights on Woolworths. In December 2014, it was reported (opens in new window) that it is investigating ‘margin backfill’ allegations made by Woolworth’s upstream suppliers.