Woolworths [ASX:WOW] chairman, Gordon Cairns finally gave shareholder what they wanted. He got rid of the toxic Masters project. But the problems don’t stop there. Cairns has had the headache of replacing outgoing CEO, Grant O’Brien. And there’s one more problem.
The court case between WOW and the ACCC (Australian Competition and Consumer Commission) is about to kick off. The competition watchdog has accused WOW of forcing suppliers to cough up $60 million in extra payments.
How it all began
In December last year the ACCC launched a legal investigation into supplier’s actions against WOW. It was believed that WOW forced suppliers to contribute towards their short falling profits. Surprisingly, this strategy was approved by senior management.
After finding a $50 million hole in their books, former head of WOW gave the green light to bully suppliers. WOW would cut their suppliers’ already diminishing income. Cairns was in no way affiliated with the allegation. Yet he will add the pending court case to his list of woes.
But why would suppliers give up their incomes? The answer is pretty simple. WOW, along with Coles, dominates the supermarket industry. Their shear buying power and customer base can make or break suppliers.
WOW can decided to exclusively buy from one dairy supplier and not others. If this happens there’s a good chance the ‘other’ suppliers will be out of the job. Thus when WOW was asking suppliers for extra payment, there was an implied assumption involved. If a supplier didn’t pay up then WOW would no longer stock that supplier’s goods.
At the time WOW claimed its conduct was consistent with industry practice to ‘engage regularly with suppliers over product and category performance.’ But if such actions are industry practice, then supermarkets could be in for a rude awakening.
WOW managed to squeeze $18.1 million from suppliers. Yet their scheme may cost the company more than $20 million. ACCC chairman, Rod Sims stated ‘If behaviour such as we are alleging is industry practice then industry practice needs to change, suppliers can’t be in a situation where they get arbitrary demands.’
Sims then confirmed his worst fears of industry practice by stating:
‘We are very surprised and very disappointed when Woolworths alleged demands surfaced late last year we were in court in relation to Coles and our proven unconscionable behaviour to their suppliers and that was all over the newspapers.’
Now Sims is hoping enormous fines will discourage WOW’s actions within the industry. But to also act as a message. The supplier and distributor relationship needs to change. WOW’s tactics to squeeze suppliers do offer value to customers. But there needs to be other ways for supermarkets to cut costs.
There’s still some good news for Woolworths
The ACCC and WOW are scheduled to attend court 7 months from now. Justice David Yates will decide whether WOW acted unfairly towards suppliers. Competition law experts have said to prove that WOW is in the wrong; their behaviour has to have gone beyond industry norms.
Since the announcement WOW’s shares have surprisingly climbed. Shares jumped as much as 2% on open. But WOW’s strong performance in liquor sales might have something to do with it.
Source: Yahoo finance
WOW has just struck a deal to exclusively sell the biggest beer brand in the world. And it will be its first appearance in Australia. Chinese beer brand, Snow, is the biggest selling beer by volume. It holds a commanding 23% market share in its home country and now WOW will exclusively sell Snow in their stores.
But I’m predicting this temporary distraction will wear off. And the fear of paying upwards of $20 million could cause WOW’s shares to nose dive.
Junior Analyst, Money Morning
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