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Suppliers told to pay up to have products removed

In a move likely to incense suppliers and earn the ire of the Australian Consumer and Competition Commission (ACCC), supermarket giant, Coles, has demanded health food suppliers pay for their own products to be removed from shelves.

Coles- owned by Wesfarmers Limited (ASX: WES), has sent an email to suppliers of health food products detailing strict conditions if they want to retain Coles as a customer. Coles is planning to remove branded health food products from its shelves as it launches its own private label brand dubbed Simply Gluten Free, according to The Australian.

In the email, Coles has demanded a 7.5% rebate on all new products for the first 13 weeks, and for suppliers to nominate a number of their products to be removed from shelves. Coles’ category manager health foods Victor Simonovich wrote in his email that the company would not accept any new lines without proposed deletes, and suppliers are required to pay Coles an amount equivalent to what the retailer would have received, if the deleted items were sold at full prices.

In addition, Coles has demanded no price rises on new lines for two years and any suppliers who fail to deliver products to Coles by May 17, will have their products automatically removed and be charged an ‘administration fee of close to $10,000.

The ACCC is investigating several complaints from suppliers regarding the practices of the big supermarkets, including Coles and Woolworths Limited (ASX: WOW). The rise of private label groceries and changes to already signed supply contracts are two of the main issues that the ACCC is looking into. The current demands issued by Coles to health food suppliers appears likely to attract the ire of the ACCC as a change to an existing contract, and illustrates the market power the big supermarkets wield over suppliers.

Foolish takeaway

We know the pressure is intense when even large suppliers like Coca-Cola Amatil (ASX: CCL) and Goodman Fielder (ASX: GFF) feel the heat from supermarket retailers and we see several food manufacturers fall over. No wonder that Coles and Woolies’ practices are being investigated.

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More reading

The Motley Fool’s purpose is to help the world invest, better.  Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Woolworths.

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