Woolworths has been accused of bullying suppliers into paying millions of dollars to fund a discount war, prompting the competition watchdog to examine whether the supermarket giant is in breach of competition and consumer laws.
Just days after Coles requested to settle a similar case with the Australian Consumer and Competition Commission, and paid a $10 million fine, Fairfax Media has obtained emails that reveal rival Woolworths requested extra payments from suppliers by the end of the month.
Only suppliers who have had their products discounted by Woolworths as part of its new "Cheap Cheap" marketing campaign have been hit with demands for extra cash payments, which will fund "the gap between sales and profit growth" on discounted lines.
They have been given a deadline of December 31 to make the payments. Many companies have already paid amounts ranging from $70,000 to in excess of $1 million.
Those who have refused to pay have been asked to meet with senior management at Woolworths.
The practice has been described as "margin filling" by Woolworths staff.
"Woolworths expects to maintain the same profit margin per item, even if it's our choice to discount it," said a Woolworths staff member.
According to the staff member, managers are under "extreme pressure" to recoup money and help the retailer avoid a profit downgrade.
The ACCC is looking at whether Woolworths is engaging in "unconscionable conduct" in its dealings with suppliers.
ACCC Chairman Rod Sims said: "We have received recent further complaints about supermarket supplier issues which we will consider. We will make no further comment at this stage."
In October the ACCC alleged Coles forced suppliers to pay "gaps" in the profit it made and the profits it wanted to make on products. It demanded payments for waste, markdowns, and late and short deliveries ranging from $5000 to $200,000.
Coles has since apologised and appointed former Victorian premier Jeff Kennett to help review contracts with hundreds of suppliers after admitting to 15 instances of unconscionable conduct.
Demands for the payment and threats of penalties have been made verbally by Woolworths, according to suppliers.
"The brutality of the threats and lack of ethics is worse than what Coles was accused of by the ACCC," said one veteran food industry executive.
"There have been implied threats, including loss of shelf position and suggestions they [Woolworths] would just deduct the amount from our accounts. They have been too smart to put any of those [threats] in writing."
A second supplier, who has been hit with a demand is just under $1 million, said he was being asked to pay for Woolworths' price war.
"They dropped the retail price to match their competitor, and then want me to fund their lost profit," said the supplier.
The ACCC has launched its inquiries on the back of information supplied by Fairfax Media. Mr Sims encouraged any suppliers impacted to come forward, and vowed to protect their identities.
"Should suppliers or others wish to provide information to the ACCC, including anonymously or requesting that information be treated confidentially, we would encourage them to contact us by calling our info centre and requesting to speak to a senior manager involved in supermarket supplier investigations," he said.
A spokesman for Woolworths said the company "categorically rejects any suggestion it has acted unconscionably" and said its buyers were "well aware" of the law.
"They are thoroughly trained to negotiate firmly but fairly with suppliers which results in cheaper groceries for our customers," said the spokesman. "We do not use threats or extract payments unilaterally. Nobody has provided evidence of any kind of inappropriate or unlawful conduct."
According to a source at Woolworths, who spoke to Fairfax Media on the basis his identity would be protected, a high-level meeting of "category managers" was held in late November.
At that meeting, managers were told they needed to recoup just under $70 million from suppliers by the end of the trading quarter, to help avoid a profit downgrade.
"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 prices.
Professor Caron Beaton-Wells from Melbourne Law School, a specialist in competition and consumer law, said the described actions may breach provisions of the Competition and Consumer Act relating to unconscionable conduct.
"It seems to be a quintessential breach of stated rules relating to fair trading and unconscionable conduct," said Beaton-Wells. "Those provisions are yet to be fully tested in the courts, so there is some uncertainty surrounding them, but I am not at all surprised the ACCC is interested. I would be surprised if they are not already investigating."
According to Woolworths, last week the company extended an invitation through the Australian Food and Grocery Council to "bring to the attention of the Managing Director any allegations of inappropriate conduct" relating to margin filling.
"Over the past two years Woolworths has worked very closely with the AFGC and suppliers to build constructive, mutually beneficial relationships and we believe issues are best resolved though this channel," said a spokesman.
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