Australia's consumer watchdog is suing Coles to stop it from extracting around $16 million a year from small suppliers in payments it says are unconscionable and unfair.
The Australian Competition and Consumer Commission (ACCC) has launched legal action in the Federal Court, accusing Coles of abusing its size and power to pressure 200 small suppliers into making the payments as part of an orchestrated effort to improve the company's bottom line.
Chairman Rod Sims accused Coles of conducting a highly orchestrated campaign to extract rebates from suppliers, in recognition of benefits it claimed they had received from changes to the supermarket's supply chain.
"We allege they used misinformation, used undue influence from their superior bargaining position, gave people only a day or two to pay up and overall were seeking money they had no legitimate basis to obtain," told AAP.
Coles allegedly received about $16 million in payments a year from the suppliers, which range from the makers of nutrition products to pet food producers.
Mr Sims said the ACCC was seeking an injunction against the payments in the federal court, along with fines against Coles that could run to millions of dollars.
The supermarket giant has vowed to fight the action and says its relationship with its suppliers is strong.
It says the changes to its supply chain benefits both suppliers and customers.
"Over the last five years, Coles has worked to significantly improve relationships with suppliers and to share the benefits of the strong growth in Coles customer numbers during this time," it said in a statement.
"In fact, Coles' support for Australian food manufacturing has never been stronger."
But Mr Sims said Coles treatment of its suppliers had been "unconscionable".
"We argue this crosses a line," he said.
"The allegations we've made, if proven, we argue would be stepping beyond the normal bounds of normal commercial behaviour."
This is the first prosecution to come from the ACCC's ongoing two-and-a-half-year investigation into the major supermarket chains' treatment of suppliers, but Mr Sims would not say if further prosecutions were planned.
The Australian Food and Grocery Council and the Council of Small Business of Australia praised the ACCC's move on Tuesday.
"This action by the ACCC sends a strong message to the supermarket and retail sectors," Council of Small Business executive director Peter Strong said.
"It says that regardless of your size you will be held accountable for your actions and the affect this has on businesses everywhere."
The case has been set down for a directions hearing in Melbourne on June 6.
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