Case study questions Carefully read the following case study and answer the questions

ACCCOUTLINES CASE AGAINST COLES FOR ALLEGED SUPPLIER MISTREATMENT

Lawyers for the competition watchdog have outlined their case against Coles to the Federal Court, alleging the supermarket giant misled suppliers in a 'formulaic way'.

The Australian Competition and Consumer Commission launched the legal action last month, alleging that Coles engaged in unconscionable conduct to increase its profits.

It alleges the supermarket set up the Active Retail Collaboration (ARC) program to make 200 small suppliers pay rebates to boost the company's profits.

At a director hearing in Melbourne today, lead counsel for the ACCC Colin Golvan SC told Justice Michelle Gordon the regulator's case will argue three main points.

"There's a lack of, your Honour, a legitimate basis on the part of Coles seeking the payment under the ARC request," he told the court.

"We will be submitting that Coles provided misleading information to these small suppliers in a formulaic way, formalised in a script.

"We say Coles used undue pressure to secure the payments, including the giving of insufficient time to consider the request.

"Coles was misusing its significantly strong bargaining position."

Lawyers for the ACCC said they have documents from its inquiry, which began on July 1 2011, but that it does not yet have documents that set out the initial phase of setting up the ARC scheme.

"We've focused very much on the implementation of the ARC scheme," Mr Golvan said.

Lawyers for Coles told the court they are keen to move the case along as "efficiently as possible".

"It is a big case, it involves 200 suppliers," Mark Moshinksky SC told the court.

The court also heard there was a need to protect the confidentiality of documents provided to the ACCC by suppliers, and six supplier interview transcripts.

The issues relating to confidentiality for the sources of those documents are expected to be resolved in the next few weeks.

The legal action follows an investigation into media reports that emerged in 2011 that suppliers were facing undue pressure from Coles.

Around 50 suppliers came forward to speak confidentially to the ACCC.

The ACCC then used its compulsory information gathering powers, forcing suppliers and Coles to provide information about the claims.

BACKGROUND TO THE COURT ACTION

The ACCC alleges that, in 2011, Coles developed a strategy to improve its earnings by obtaining better trading terms from its suppliers.

It is alleged that one of the ways Coles sought to improve its earnings was through the introduction of ongoing rebates to be paid by its suppliers in connection with the Coles ARC program, based on purported benefits to large and small suppliers that Coles asserted had resulted from changes the supermarket had made to its supply chain.

The ACCC alleges Coles' target was to obtain $16 million in ARC rebates from smaller suppliers and was ultimately seeking an ongoing ARC rebate in the form of a percentage of the price it paid for the supplier's grocery products.

Coles continues to strongly deny the allegations.

"The aim of this program was to deliver cost savings to both Coles and suppliers and to improve product availability and enhance supply chain collaboration," the supermarket giant said in a statement.

"By working closely with its supply partners, Coles aims to build strong relationships, create product innovation and deliver savings for customers."

The competition watchdog is taking Coles to court amid allegations the supermarket giant demanded payments from its suppliers it was not entitled to.

The Australian Competition and Consumer Commission (ACCC) has accused Coles of engaging in "unconscionable conduct" in breach of the Australian Consumer Law.

Coles faces penalties of more than $1 million for each breach.

ACCC pursues Coles 'perfect profit day' practices in unconscionable conduct case (PM)

In an interview with the ABC, ACCC chairman Rod Sims alleged Coles had applied undue pressure to its suppliers even though it had no contractual right to do so.

"We're alleging that Coles took advantage of its superior bargaining position to demand money that it either knew or ought to have known that it didn't have a right to," he said.

In a statement, Coles rejected the ACCC's claims.

It said the allegations concerned a limited number of dealings with five Coles suppliers five years ago.

"All five suppliers continue today to be valued suppliers to Coles," the statement said.

The ACCC said the new case involved the way Coles dealt with its suppliers on a day-to-day basis.

It alleges Coles in 2011 pursued agreements with suppliers to make them pay for profit gaps - the difference between the amount of profit Coles wanted to make on the goods and the amount it achieved.

The watchdog also alleges Coles chased agreements with suppliers for amounts it claimed as "waste" on a supplier's goods and price reductions or "markdowns" used by Coles to clear the products.

It has also accused Coles of imposing fines or penalties on suppliers for short or late deliveries.

The ACCC alleges the profit gaps, waste and markdowns were usually outside the control of the suppliers, and the amount Coles imposed was unrelated to the value of the goods nor any loss Coles may have suffered.

COLES ACTIVELY MANAGES POOR PERFORMANCE OF PRODUCTS

The ACCC also alleges Coles applied undue pressure by in some cases threatening measures that were commercially detrimental to the suppliers if they refused to agree to the payments.

In response, Coles said it actively managed issues of waste and the poor performance of products because not doing so led to higher prices for customers.

"Product waste can arise from various means including faulty packaging of product by suppliers, suppliers delivering products too close to their use-by date, or mishandling by suppliers or Coles," the company said.

"In other words, responsibility for waste may lie with the supplier, the retailer or it may be shared.

"Payments for waste are a common business practice in retail in Australia and around the world."

The ACCC has also accused Coles of withholding money owed to suppliers and refusing to repay money when it knew it was not entitled to do so.

MANAGERS USED PROFIT DAYS TO CHASE SUPPLIERS: EMAILS

Court documents lodged by the ACCC refer to "profit day" or "perfect profit day" each calendar year when managers were under pressure to demand payments from suppliers to increase the supermarket's profits.

In an excerpt from an email on October 5, 2011, a manager said: "Our profit position still well behind budget, we now need to be chasing all suppliers for any profit gaps we have to sales."

Another email from November 8, 2011, said: "Ring suppliers today if you are short on profit."

Managers were reminded in another email that the perfect profit day strategy was "meant to be kept low-key".

'COMMERCIAL NEGOTIATIONS CAN BE ROBUST'

Coles said the discussions around profit day were aimed at improving the profitability of the products.

"Products with poor sales performance limit Coles's ability to deliver value to customers," it said.

"The failure of suppliers to deliver agreed quantities ofstock at agreed times, contrary to the terms of their contracts with Coles, results in significant shortages of stock in store. Empty shelves are a major source of customer frustration."

Coles said the individual communications were part of ongoing commercial negotiations with suppliers in the lead up to Christmas 2011.

It said the communications were normal topics for business discussions between grocery suppliers and retailers.

"Commercial negotiations can be robust, regardless of the industry or sector," a Coles spokesperson said.

The ACCC has been investigating claims for some time that the big supermarket chains have abused their market power by bullying suppliers.

END

Question 1 : In your understanding from the case, what is the meaning of the term 'unconscionable conduct' in supply contract relations and could you provide two types of situations where this term applies within the Supply Contract Management (SCM) industry.

Question 2 : In your concluding analysis why is Coles' management of their suppliers, as alleged, bad for business? What conflict of interest exists between consumers and shareholders and explain the key motivations of the two groups. How do competitors benefit from this situation in the market?

Question 3 :What implied terms are needed for suppliers to deem them to be unfair trading terms. Give three such examples?

Question 4: What is your understanding of the role and significance of the ACCC in the context of managing supply contracts in Australia? Why does the ACCC and other such legislation bodies exist? How are these legislation authorities referenced in supply contracts? What benefit do they offer suppliers and customers?

Question 5 : Why, according to the ACCC, is it unreasonable for Coles to impose payments for profit-gaps, product waste and markdowns? In your studies what will such actions be referred to? What section of the contract should these conditions be agreed and when?

Question 6 : What supply contract complexities do you see have been covered in this case study. Identify three and briefly explain them?

Question 7 : "By working closely with its supply partners, Coles aims to build strong relationships, create product innovation and deliver savings for customers."

Explain briefly why the court rejected the above statement as a good explanation of the implementation of the ARC scheme. Discuss how suppliers and customers can build strong relationships and create innovative benefits to both parties with TWO examples. Identify where in the procurement cycle does this take place and why?

Question 8 :What were the three allegations that the ACCC were making against Coles in this case? For each of these allegation comment on the contract obligations of the suppliers and Coles. What should have been the necessary express and or implied terms of the contract for these requirements to be contractually agreed?

Question 9: From the case the ACCC says it is representing 400 suppliers yet initially only "around 50 suppliers came forward to speak confidentially to the ACCC". Why, in your opinion did only a small number of suppliers come forward? What are the supplier risks that exist in this case? List four (4) such relevant risks?

Question 10 : Outline the contract supply terms that should be agreed expressly by Coles in order to implement any schemes for profit gaps going forward?