The ACCC is investigating Coles and Woolworths for bullying business tactics that have forced some food suppliers to end their relationships with the supermarket giants, while others struggle to survive, writes Hagar Cohen.

Barry Clarke refuses to work with Coles and Woolworths.

A decade ago, the South Australian dairy farmer was fed up with the low prices he was getting for his milk. So one day, while on a family holiday, he decided to embark on the biggest financial risk of his life, and open his own milk processor.

To his surprise Clarke was approached by a Coles supermarket representative who wanted to start stocking Clarke's dairy products on the supermarket shelves.

"I asked what sort of money were they looking at paying per litre, and he didn't seem to think that price was an issue. It was whether we could supply enough products for him."

"They told me 'Don't worry about the price at this point. If you can supply us with enough product then we'll work out a price'. And I found it easy to say we didn't have enough product," Clarke says.

Clarke knows of other farmers who "got in bed" with the giant supermarket retailers, and are now dependent on them.

"The big supermarkets take more and more of your product until you're producing most of your product out of your factory to go to them, and once that happens and you lost the rest of your market, than they can tell you that they will pay you whatever they like, and that leaves you with nowhere else to go."

Woolworths today announced it would buy milk directly from some of its suppliers, part of a plan to save on the middle man and pay farmers more, but dairy industry representatives say the new system will not necessarily mean farmers get a better deal.

Coles and Woolworths control about 70 per cent of the grocery market in Australia. This massive market power, and whether it's being abused, is now the subject of an inquiry by the Australian Competition and Consumer Commission.

Food suppliers allege they are being bullied by the giant retailers with one even claiming he's been blackmailed by supermarket representatives.

"Their behaviour was really blackmailing," says the supplier, who wants to be known as 'Danny'.

'Danny' is CEO of a national food company that supplies both Coles and Woolworths. He says that unless he agrees to financial concessions his products will be taken off the shelves. He also says that supermarket buyers have used threats to get their way.

"A threat will be financial demands to stay on the supermarket shelves. The supermarkets expect a certain quantity of sales from your products and if that is not met they request a lump sum of money to be passed on to pay for that shortfall."

This allegation forms part of the confidential evidence 'Danny' has given to the ACCC.

So far representatives from both supermarkets have said they are confident they will be cleared of any wrongdoing.

But 'Danny' says he realised just how widespread his experience with the supermarkets was when he met other food suppliers who also gave their confidential testimonies to the ACCC.

"Speaking to the ACCC, it puts these things out in the open. Companies understand that it's not isolated situations that they go through. We get to know that things we experience are happening with other companies," he said.

In this challenging retail environment, many food manufacturers have already started to disappear.

The bankruptcy of the last wholly Australian-owned cannery, Windsor Farm Foods, is the latest example.

Industry consultant David McKinna says that if things don't change soon Australian-made food products may become a luxury of the past.

"The reality is that we're going to lose a lot of food companies," he says. "An increasing proportion of food is going to be imported, and the ability to supply fresh foods is going to be diminished."

Arisocrat is another Australian brand close to collapse. The company is well-known for its pickled onions.

Until four years ago Aristocrat was a family-owned business headed by Barry Fawcett.

Fawcett says that when he ran the business threats of "deletion" were constant. Supermarket buyers would usually request discounts in return for a guarantee products would stay on the shelves.

"They were constantly putting forward requests for additional trading terms," says Fawcett. "They would find avenues to either squeeze more margins out of you or request more money to be spent on the product to keep it on the shelf."

Fawcett says he was given between two to three weeks to respond to these kinds of ultimatums. "Not a great deal of time. If you couldn't resolve it you'd be gone".

Coles and Woolworths represented more than 60 per cent of his business. They were his biggest customers. Losing them he says, would have been disastrous.

"If you lost those two customers it would be death, there's no question at all. You'd have to reconsider whether or not you continued in business."

In a number of instances, Fawcett simply couldn't comply, and several of his products were "deleted" as a result.

Another food supplier, who wants to be known as 'Joe', says that the terms supermarkets subject their suppliers to are getting worse.

With no notice, one of his products was deleted from the supermarket shelves after it had already been delivered.

"Quite literally we found out when a delivery truck was rejected at the supermarket warehouse," he says. "We were fulfilling an order. To our understanding we were meeting both internal and external benchmarks. We never thought there were any concerns."

This wasn't a one-off experience, says Joe.

On another occasion, in the lead-up to Christmas, the promotion schedule for his product - which had been planned months in advance - was suddenly cancelled. It was devastating for his business.

"We had built up stocks in anticipation of large sales, and then a short period before the promotion was due to run we were advised that all of the promotions had been cancelled."

Instead the supermarket's private label products were given the special promotion spot on the shelves.

Coles managing director Ian McLeod has said that this kind of behaviour is unacceptable.

"If you commit to an agreement then you need to follow that through. Otherwise it undermines your credibility."

Coles is currently drafting a voluntary code of conduct for supermarkets, together with Woolworths and the Australian Food and Grocery Council.

Dairy farmer-turned-entrepreneur Barry Clarke isn't convinced by this initiative.

He says the only way to avoid being abused by the supermarkets is to steer clear of them in the first place. Even if it means alienating a big percentage of his target market.

"We make a premium product, and it costs more. The cheaper milk is available, and if people can't afford our product so be it. We're certainly not prepared to reduce our price. I guess we've been down the road of supplying cheap milk, and it didn't work for us."

Hagar Cohen is an investigative reporter with the ABC's Background Briefing program. View her full profile here.

Listen to the full Background Briefing broadcast, ‘Casualties in the supermarket war’, here.