FOOD and liquor giant Coles faces penalties of $10 million and may have to pay as much as $16m in refunds after admitting that it engaged in unconscionable conduct with small grocery suppliers.
In an embarrassing mea culpa, Wesfarmers group managing director Richard Goyder and Coles managing director John Durkan apologised unconditionally for the retailer's dealings with suppliers after reaching a historic settlement with the Australian Competition and Consumer Commission (ACCC).
"I believe that in these dealings with suppliers, Coles crossed the line and regrettably treated these suppliers in a manner inconsistent with acceptable business practice," Mr Durkan said.
"Coles sincerely regrets and apologises for its conduct in these dealings."
Mr Goyder said both Wesfarmers and Coles "sincerely regretted" the unacceptable conduct, but voiced his support for Mr Durkan, dousing concerns he would be forced out for playing a major role in one of the cases brought by the ACCC.
Grocery industry sources said the proposed settlement would strengthen suppliers' negotiating power with the major chains and give suppliers the confidence to push back against much-maligned practices such as 'cliffing' – where products are removed from supermarket shelves – and demands for extra payments for wastage, shrinkage and late deliveries.
"The decision by Coles to make a full apology and its admission that it 'crossed the line' will help to establish where that line is with regard to the behaviour of supermarket retailers in their trading relationships with suppliers," said Australian Food and Grocery Council (AFGC) chief executive Gary Dawson.
The ACCC is seeking penalties of $10m – or $1.1m for each admission – while Coles has agreed to refund smaller suppliers who were forced to pay extra rebates to fund the cost of a supply chain improvement program.
Depending on the number of suppliers who claim refunds, Coles potentially faces a total payout of $26m.
Message to corporate Australia
However, Federal Court judge Michelle Gordon believes the penalties should have been higher and has reserved her judgment, which may not be handed down until later this month or early next year.
Justice Gordon said the penalties Coles faced should have been higher to send a message to corporate Australia and provide an "important element of deterrence" to others.
"I don't regard these penalties at the top end for these proceedings at all," Justice Gordon said.
"This conduct could have attracted considerably higher penalties.
"You are dealing with a company worth $22 billion on one side and the smallest supplier worth less than 0.1 per cent of that on the other," she said.
Counsel for the ACCC, Norman O'Bryan SC, urged the judge to accept the penalties, despite them being at the "top end" of $1.1 million for each contravention.
"This is not only a test case but a headline test case. It is one of the largest companies involved in trade and commerce in the country dealing with some of the smallest suppliers," he said.
Shares in Wesfarmers, fell 90 cents, 2.2 per cent, to $40.52.
The ACCC took legal action against Coles in October, alleging that Australia's second-largest food and liquor retailer breached the law by engaging in unconscionable conduct against five suppliers, taking advantage of its superior bargaining position to demand money from suppliers to which it was not lawfully entitled.
Coles is alleged to have forced suppliers to pay "gaps" in the profit it made and the profits it wanted to make on products such as frozen food, potato chips and shower cleaner – demanding payments for waste, markdowns, and late and short deliveries ranging from $5000 to $200,000.
In May, the ACCC accused Coles of unconscionable conduct by using unfair tactics and misleading information to force about 200 suppliers to pay extra rebates to fund the cost of a supply chain improvement program, Active Retail Collaboration.
Coles initially denied the allegations and said it would vigorously defend both cases. In October, former Coles managing director Ian McLeod said the retailer would be "vindicated" in court.
Fairfax Media revealed last Friday that Coles was in talks with the ACCC to settle the legal action, which shone a spotlight on heavy-handed tactics against suppliers and dented Wesfarmers' corporate reputation.
Mr Durkan said Coles had extensively reviewed the materials made available by the ACCC and its own internal investigations and had made 15 admissions of unconscionable conduct. He agreed with ACCC chairman Rod Sims, who said at the time the alleged conduct was contrary to prevailing business and social values.
"In the dealings we have identified, I believe that statement is appropriate," Mr Durkan said.
Coles has proposed an undertaking to the ACCC to establish a formal process that will enable smaller suppliers involved in the Active Retail Collaboration program to seek recourse if they believed the benefits from the program fell short of the costs incurred.
Jeff Kennett as independent arbiter
This process will be led by an independent arbiter, former Victoria Premier Jeff Kennett, who was recently appointed to the role of independent arbiter under the Coles supplier charter.
In relation to the second case involving five small suppliers, Mr Durkan said they were not treated with the transparency and respect that they should be able to expect."
"Coles unconditionally apologises and accepts full responsibility for its actions in relation to these five suppliers."
Mr Durkan said that since these incidents occurred in 2011, Coles had taken many steps to improve its relationships with suppliers and help its suppliers to grow – for example signing long-term supply agreements.
Speculation that Coles might try to settle the cases emerged last month, when Wesfarmers chairman Bob Every told shareholders at the annual meeting that Coles had made mistakes in its dealings with suppliers.
"There is no doubt Coles has made some mistakes in the past. Since the (ACCC) investigation started Coles has taken many steps to seek to avoid similar problems in the future," Dr Every said.
"The ACCC commenced its investigation in June 2012 and the board has had strong oversight of the matter since it began and continues to monitor it closely," he said.
These steps included working with the AFGC, Woolworths and the federal government to develop a voluntary industry code of conduct, beefing up Coles' internal code of conduct, launching a supplier charter and training buyers on competition laws.
"The positive aspect of this proposed settlement is that it would bring this matter to an end," said Mr Goyder.
"Coles remains absolutely committed to delivering great value to Australian families under the very strong leadership of managing director John Durkan," he said.