Coles Group Limited (ASX: COL) has been caught out by the ACCC for breaking a promise to farmers and the country.
You may remember several months ago that the large supermarkets of Coles and Woolworths Group Ltd (ASX: WOW) said they would pay more money to Aussie farmers for milk who were suffering in the drought.
Coles promised that it would pay $0.10 a litre more to farmers for milk.
However, it turns out Coles wasn't paying Norco – one of several suppliers – the correct amount of money according to reporting by the Australian Financial Review.
The ACCC looked at claims that when an unrelated 6.5 cents a litre price increase went through on 1 April 2019, Coles reduced payment to Norco from 10 cents a litre to 3.5 cents a litre.
The AFR quoted ACCC Chairman Rod Sims, "We were fully prepared to take Coles to court over what we believe was an egregious breach of the Australian Consumer Law – we believe we had a strong case to allege misleading conduct by Coles. Accepting this commitment means that farmers will receive additional payments from Coles, with the majority of the money to be paid to Norco within seven days.
"Court action would also have taken many months if not years, with no guarantee that any money would have been paid to farmers as a result."
The ACCC said that it understands Coles did pass on the increase to other processors, however Coles will need to pay the extra 7 cents per litre for the eight month period within a week. This will cost Coles $5.25 million in total.
Of course, Coles said that the ACCC was wrong in its interpretation of the issue but it would make the payment. The ACCC isn't messing around, it said it would take legal action in the future if necessary.
Foolish takeaway
That's $5.25 million that will be taken off the next Coles profit result. I'm not surprised the Coles share price is 2% lower than the high reached at the start of trading today.
Coles is valued at 22x FY21's estimated earnings with a projected grossed-up dividend yield over the next 12 months of 5.1%. Coles is not a bad business, but I'm not sure how strongly it can grow profit from here.
