Retail rebates in spotlight as ACCC launches serious action against Coles supermarkets

Coles is in the ACCC’s firing line after it was alleged the supermarket giant was placing undue pressure on smaller suppliers to agree to rebates on goods purchased at wholesale and then sold at retail.

The ACCC instituted proceedings against Coles today in Federal Court, after an extensive 3-year investigation into the matter, which included confidential submissions from 50 suppliers.

In addition to the margin between a wholesale price and a retail price, which is the traditional method of profiting in the retail industry, retailers also charge rebates on suppliers, in the form of a percentage of the wholesale price, which vary from retailer to retailer and supplier to supplier. The more powerful the retailer in a certain industry, the more pressure it can normally apply to suppliers to agree to a rebate. These rebates are often explained as being used to fund marketing, especially catalogue advertising.

Suppliers can also use rebates as a way of offering more profitability to one retailer instead of another. For example, the wholesale price for Retailer A and Retailer B could be the same, implying an equal level of profitability (assuming both retailers sell the product at RRP), but if one has a more favourable rebate, it means they are making more profit from each sale, unbeknownst to the other retailer.

The ACCC has alleged that in 2011, Coles sought to raise $16 million through renegotiated rebates with what the ACCC calls ’200 smaller suppliers’. Coles contacted these suppliers through its product sourcing web portal, the ACCC says, demanding they agree to the terms within a few days of contact. Those that didn’t agree were threatened with adverse consequences, the ACCC alleges.

“If these suppliers declined to agree to pay the rebate, Coles personnel were allegedly instructed to escalate the matter to more senior staff, and to threaten commercial consequences if the supplier did not agree,” said an ACCC spokesperson. “The ACCC alleges that, in a number of cases, threats were made when suppliers declined to agree to pay the rebate.”

In the ACCC’s detailing of its allegation, it says that Coles based its rebate demands on how much it believed the suppliers could afford to pay, based on the supermarket’s order size with the supplier. Although not explicitly stated, the ACCC strongly hints that when approaching these small suppliers, Coles made suggestions that not agreeing to the rebate would lead to reduced or complete de-ranging, which would lead to the supplier facing a tremulous future:

Coles was ultimately seeking an ongoing ARC rebate in the form of a percentage of the price it paid for the Supplier’s grocery products, which, for its smaller suppliers, was the sum of a percentage which Coles asserted was referable to the value to the supplier of being able to access the Coles supplier portal and, where applicable, a percentage based on the asserted value to the supplier for Coles having changed its ordering patterns to order products in “economic order quantities”.

In its allegations against Coles, the ACCC includes a point that is likely to gain the attention of both suppliers and retailers across all retail industries:

“The ACCC alleges that Coles has engaged in unconscionable conduct towards 200 of its smaller suppliers, in breach of the ACL by…taking advantage of its superior bargaining position by, amongst other things, seeking payments when it had no legitimate basis for seeking them.”

ACCC chairman Rod Sims was adamant that he had the support of the Australian public in pursuing this case and attempting to regulate the retailer rebate relationship.

“The conduct of Coles alleged by the ACCC in these proceedings was capable of causing significant detriment to small suppliers’ businesses,” he said. “This could have resulted in these businesses becoming less able to plan and less able to innovate in the market, with resulting reduced economic efficiency and consumer detriment.”

Friction revealed as study shows suppliers and retail buyers not on same page

New research paints a dysfunctional picture of the relationship between suppliers and FMCG buyers during the product ranging process in the Australian retail industry.

The study into category buying was conducted by RangeMe, an online service launched in March 2014 connecting buyers and suppliers, and found that 76 per cent of FMCG buyers missed out on new product launches when suppliers failed to present the products directly to them.

RangeMe surveyed buyers from over 30 retail leaders including Harvey Norman, BIG W, Kmart, 7-Eleven, IGA, Chemmart and Priceline and found that 97 per cent received incomplete information from suppliers to make a ranging decision and 96 per cent received proposals outside of their pre-defined category review times.

Conducted in January 2014, the survey also found that 88 per cent of buyers received proposals outside of their buying categories and 72 per cent received proposals for products that did not comply with Australian standards.

Nicky Jackson, RangeMe Founder and CEO said, “Anecdotally, we knew that there was a problem in the way that buyers received proposals from suppliers of consumer goods such as food, healthcare, cleaning and personal care items. However we did not realise that it was so significant and widespread.

“There is a divide between how FMCG buyers and suppliers operate and it is clear that they are not in sync with each other. This results in lost time and missed product opportunities,” she said.

Jackson, a former marketing executive with Kellogg’s, learnt first-hand how difficult it can be as a supplier finding buyers. In early 2013 she embarked on developing a range of baby skincare products, a project she later abandoned, not wanting to get caught out with excess product and no buyers.

From that experience RangeMe was born, a website that streamlines the ranging process for products. Suppliers upload their products and information, and according to preferences, category buyers and suppliers are matched up so they can negotiate.

Jackson said it’s very difficult for suppliers to get their foot in the door with a buyer and a lot of suppliers probably just don’t have the knowledge of what the buyer wants or needs.

“Suppliers might have fantastic ideas and products but commercially there is a bit of a disconnect,” she said. “RangeMe has been developed in conjunction with buyers to get the pitch right the first time. That is why it is very useful because a buyer gets to see the right information every time.”

Since its launch in March 2014 more than 100 suppliers have signed up to the service and buyers include IGA, Toys R Us and City Convenience Store.

Jackson said the business is building up a mass of suppliers and buyers in grocery, pharmacy and baby and early childhood products but could be expanded into other areas if there is enough interest from relevant suppliers and buyers.