Lawyers for the competition regulator have challenged Woolworths' claim that asking suppliers for money to prop up profits was "entirely reasonable" and an ordinary, "everyday" part of doing business.
Woolworths has been accused by the Australian Competition and Consumer Commission of acting unconscionably by demanding more than $60 million from underperforming suppliers in the weeks before Christmas 2014 to plug a $50 million hole in its profits.
The scheme, dubbed "Mind the Gap", raised $18 million, most of which fell straight to Woolworths' bottom line in the December-half fiscal 2015.
In the Federal Court on Wednesday, counsel for the ACCC, Norman O'Bryan SC, asked one of Woolworths' key witnesses whether he had ever come across a similar program at Woolworths before.
The court had previously heard that Woolworths gathered hundreds of buyers and category managers together on December 8 at its Bella Vista headquarters and explained the Mind the Gap scheme.
Requests for cash were to be made over the following week. Suppliers who baulked at paying were escalated up Woolworths' chain of command and repercussions, such as range reviews and stock delisting, were threatened.
Woolworths' witness James Tan, who was at the time head of trade for packaged and international foods, had said in a sworn affidavit that seeking extra cash from suppliers was an "everyday" and ordinary part of doing business in supermarket retailing.
"Mind the Gap was not an ordinary everyday negotiation between Woolworths buyers and suppliers, was it? It was the first time ever in your experience that such a program had been implemented and undertaken?" asked Mr O"Bryan.
Mr Tan: "The program of Mind the Gap yes."
Mr O'Bryan: "It was not everyday was it?"
Mr Tan: "I agree it was not ordinary as a program."
Mr O'Bryan: "It was the first time, whatever its name, it was the first time ever the whole buying community was sent out into the field simultaneously to undertake this exercise?
Mr Tan: "Yes."
The court had previously heard that some buyers and category managers misinterpreted or did not understand the data and scripts provided to them by Woolworths and demanded payments that were overinflated.
In one example, a Woolworths buyer asked Manassen Foods for $28,548, citing a decline in its trade spend and a fall in the gross margin Woolworths made from sales of Manassen's products – two of the four "lenses" Woolworths applied to identify suppliers that would be approached for Mind the Gap payments. Only one lens should have been applied.
Rinaldi Pasta was asked to come up with for $287,000 after a buyer "erroneously" used two lenses instead of one, while the owner of the Ayam Brand was asked for $39,000, even though sales in the four months ending October had risen strongly, Woolworths' gross profits from that brand had risen 41 per cent, and the gross profit margin had risen 400 basis points, from 44.5 per cent to 48.5 per cent.
"To make that demand from them in Mind the Gap is just greedy isn't it? It's quite unreasonable?" Mr O'Bryan said.
"I wouldn't agree with that," said Mr Tan.
The court also heard on Wednesday that Manassen and its subsidiaries including Sunbeam Foods received 15 or 18 "asks" from different buyers, even though its sales and gross profit growth had been strong.
"Do you recall anybody saying during the Mind the Gap week would it be sensible if we approached the large suppliers with only one ask and asked them for a single amount rather than 15 or 20 single asks?" Mr O'Bryan said.
"No I don't recall," Mr Tan replied.
Mr O'Bryan said this behaviour was "part and parcel of the unconscionability of this conduct".
Under Mind the Gap, Woolworths wanted to earn a 20 basis point increase in gross margin from every 100 basis point increase in a supplier's sales. This was one of the four lenses the retailer used to assess and identify suppliers who would be approached for cash.
However, Mr O'Bryan said Woolworths had never informed suppliers that it was reviewing their performance on this new criteria.
"Wouldn't it have been fair and reasonable for Woolworths to tell suppliers it proposed to apply that lens to their performance?" said Mr O'Bryan.
"Not necessarily, it's an internal lens," said Mr Tan.
Woolworths has accused the ACCC of misunderstanding the relationships between suppliers and retailers, saying suppliers do not supply goods on terms that are fixed in advance for a given period and the prices paid by Woolworths are the subject of ongoing negotiations.
However, it admitted on Tuesday that it had no legal or contractual basis for asking suppliers for the extra cash.
The case returns to court on Thursday.