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Woolworths Limited accused of mafia tactics in NZ

Woolworths Limited (ASX: WOW) has been accused of “unchallenged extortion” against suppliers in New Zealand where it owns the Countdown brand of supermarkets under subsidiary Progressive Enterprises.

The supermarket giant operates 168 supermarkets in New Zealand, but MP Shane Jones has claimed during a parliamentary speech yesterday that company’s management has threatened to drop suppliers from shelves and ‘blacklist’ them if they did not make cash payments to cover losses made by the supermarket.

Jones described Countdown as has having “a corporate culture that can only be described as something that Tony Soprano would be very proud of” for blackmailing of suppliers.

Woolworths competes with Wesfarmers Ltd (ASX: WES) owned Coles in Australia, but in New Zealand operates in a duopoly against local supermarket operator Foodstuffs.

The company has been a screaming success for many long-term shareholders, with shares rising 43% over the last two years, but Jones’ accusations suggest the relentless drive for profit has come at the expense of suppliers.

“[The suppliers] are being told by the Australian-owned supermarket ‘our profit margins did not meet the shareholders’ expectations last year. We want more profit out of you’“. Countdown refutes the claims, but Shane Jones said he would be making an official complaint to the New Zealand Commerce Commission.

Woolworths’ sales results for the first half of the 2014 financial year showed slight growth in its New Zealand operations. Sales were up 2.6% in NZ dollars, from $2.94 billion to $3.02 billion, but 15.2% in AUD, which reflects the strengthening of the New Zealand dollar against the Aussie.

Woolworths’ power as a buyer gives it a solid competitive advantage from a shareholder perspective, but the battle to increase margins has a clear impact on other business. In 2012 Coca-Cola Amatil Ltd (ASX: CCL) noted the pressure it was under from the supermarket to help it lift margins at a cost to the company.

Foolish takeaway

Woolworths’ website says the company works ‘most constructively’ with suppliers focused on growth and innovation, but the allegations of blackmail and extortion suggest that the ‘most constructive’ technique in the drive for profit may be utilising the company’s significant buyer power.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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