News

14 Jul 2014

How Market Power is Abused

Coles face fines of $200 million

In 2011 Coles supermarket chain merchandise director John Durkan had a brilliant idea. He approved a plan to hit on 200 suppliers and demand money.

The way retail has worked for the past thousand years or so is that suppliers sell goods to retailers, who then mark up and sell to the public. Coles decided they wanted some action from the other direction, to boost profits.

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The massive Perth based conglomerate hired guys like Durkan, who is so revered he is now the incoming boss of the supermarket chain – clearly in part because of his brilliance in standing over the suppliers.

Here’s how it happened: Durkan hired Boston Consulting Group, the global business consultants who know how to force-fit analysis and who typically study enterprise with only one objective: to lift profits as soon as possible. Any MBA student will become very familiar with the BSG model.

The recommendation (according to reports of the legal action taken by the Australian Competition and Consumer Commission) was to ask 200 ‘tier-3’ suppliers for money, in exchange for Coles continuing to stock their brands. One such demand was placed on Rosella Foods, which subsequently went broke.

An example was detailed in court documents. Red Bull drink firm were told that Coles valued improvements it had made to their supply chain at $400,000 so Red Bull were required to pay $200,000. The assertion was Red Bull were ahead because of something Coles did, so Coles wanted half the dosh.

But the ACCC claims Durkin had no reasonable basis for the claim, and didn’t supply the drink company with evidence to back up his demand. Suppliers that resisted the demands were placed on a ‘escalation’ list and some claim they were then told Coles would delay discussions on new products, or would not promote products. This was apparently part of the BSG master strategy

The BCG plan aimed at boosting profits by $30 million. The ACCC can ask for fines of up to $200 million. Whether BSG will in turn face a damages claim from Coles remains to be seen, but one would imagine when they gave their ‘advice’ they had a rock solid indemnity agreement in place.

For its part Coles owner Westfarmers said they fully support their guy, but if they get slugged part of a $200 million fine that will change overnight.

What’s the lesson for us in the backwaters of showbiz? Don’t abuse market power.

Imagine if one of the audio or lighting distributors wrote to retailers demanding money in exchange for access to its goods. Or imagine if a concert promoter / theatre producer demanded rebates AFTER work was done, on the basis they calculated that you made xx profit and so by now ‘knowing’ this (after the work was done) they require you give some of it back?

By the way, ACCC haven’t taken legal action against the other huge supermarket chain Woolworths. But there are signs there may be trouble brewing there as well.

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