Woolworths staff are squeezing a further $70 million from suppliers by the end of the year, as the company scrambles to meet profit guidance and avoid its first downgrade in almost 16 years.
Documents obtained by Fairfax Media reveal a push to drag millions of dollars from suppliers before December 31, the end of the trading quarter for Australia's biggest retailer.
The documents include emails revealing that Woolworths has requested extra payment from suppliers to fund the "gap between sales and profit growth" on products it has discounted as part of its "Cheap Cheap" marketing campaign.
The majority of the email requests for money obtained by Fairfax Media were made on December 4 and December 5, immediately after analyst warnings that Woolworths could notch it first fall in underlying profits for about 16 years.
Bank of America Merrill Lynch analyst David Errington was one of those who sounded the alarm and cut his share-price target for Woolworths, warning its net profit could fall 1.5 per cent in 2016 and 5 per cent in 2017.
Woolworths three weeks ago used its annual general meeting to address these concerns and reaffirmed its guidance for 4 to 7 per cent profit growth this financial year, despite a "very competitive" market and "softer than expected" first quarter growth. Analyst consensus is for 4.6 per cent growth now, towards the bottom end of guidance.
Following inquiries from Fairfax Media, the competition watchdog is now examining the claims that Woolworths is pressuring suppliers to make the payments.
Woolworths "categorically" rejected any suggestion it was acting "unconscionably" and vowed it would "continue to work with suppliers to invest in lower prices on our shelves, which over the past 12 months has meant more than $750 million in savings given back to customers".
Woolworths said it had worked closely with suppliers and the industry body, the Australian Food and Grocery Council, over the past two years to "build constructive, mutually beneficial relationships and we believe issues are best resolved though this channel".
The AFGC said it expected Woolworths to continue to make payment requests.
It has advised its 180 manufacturing members to require any claim from the grocery giant to be put in writing, to request supporting data and adequate time to consider, and to present counter evidence where appropriate.
It said Woolworths had advised that talks "should be conducted with the goal of achieving a fair outcome (not limited just to payments) and include consideration of the supplier's viewpoint".
The revelations follow a landmark admission from supermarket rival Coles of 15 instances of unconscionable conduct against eight suppliers, and Woolworths reaffirming its annual guidance.
Woolworths and Coles are estimated to have about 75 per cent of the grocery market. Local supermarket margins are the highest in the world, but Woolworths' margins are under pressure due to the revival at Coles and competition from discounter Aldi.
According to a senior Woolworths staff member, concerns that the company will not meet guidance for the quarter are driving the squeeze on suppliers.
The staff member detailed a meeting of category managers in November at which they were told an estimated $70 million was needed by the end of the quarter.
Staff were told to extract additional payments from suppliers whose product lines had been discounted, a practice referred to internally as "margin backfill".
"We call it margin backfill," said the source at Woolworths. "We discount a product to increase sales, but the profit per item is lower. Management has pressured us to go back to the suppliers and get them to pay the gap, as if we had sold that amount of product at the normal RP [retail price]."
Suppliers have been asked to fund about 80 per cent of the lost profit Woolworths would have made if it had not discounted its prices.
Only suppliers who have had their products discounted by Woolworths have been targeted with demands for extra cash payments.
They have been given a deadline of December 31 to make the payments, some of which are in excess of $1.5 million. Those who have refused to pay have been asked to attend Woolworths offices this week and meet with senior management.
Demands for the payment have been made verbally, according to suppliers.
Coles on Monday agreed to pay $10 million in penalties and to review contracts with hundreds of small suppliers – reviews that are likely to lead to refunds.
"We are genuinely contrite, your Honour, and we have taken steps to ensure that that kind of conduct will not recur," Coles counsel Neil Young, QC, told the Federal Court, as it offered to settle two major unconscionable-conduct cases brought by the ACCC.
The behaviour included telling suppliers if they didn't agree to the new payments, Coles wouldn't buy their new products or promote existing ones. Coles also did not pass on information explaining its new payment requests, and "escalated" suppliers who did not agree within a tight timeframe.
Coles had initially denied the allegations and vowed to vigorously defend itself. The ACCC's original case against Coles had centred on dealings with about 200 suppliers.