The Australian Competition and Consumer Commission is taking Coles to court over its treatment of suppliers.

The ACCC has instituted proceedings in the Federal Court against Coles alleging that it engaged in unconscionable conduct in its dealings with 200 of its smaller grocery suppliers, under what the supermarket called the Active Retail Collaboration (ARC) program.

The competition watchdog is alleging that in 2011 Coles developed a strategy to get cheaper prices from its suppliers, and one of the methods was a rebate to be paid by suppliers to reward Coles for the purported benefits to them of the ARC program.

It is alleged that Coles targeted $16 million in rebates from smaller suppliers, and was seeking ongoing rebates based on a percentage of the price it paid for the grocery products.

The ACCC alleges that Coles gave some suppliers only a matter of days to agree to the rebates and, if the supplier refused, that suppliers would be threatened with commercial consequences - it argues that some threats were actually issued to certain suppliers.

ACCC chairman Rod Sims says the regulator will be arguing that several behaviours by Coles breached the Australian Consumer Law (ACL).

"The ACCC alleges that Coles used undue pressure and unfair tactics in negotiating with suppliers, provided misleading information and took advantage of its superior bargaining position, so that its overall conduct was in all the circumstances unconscionable," he said in a statement.

"If this conduct is established in court, the ACCC expects that the community will share the ACCC's view that business should not be conducted in this way in Australia."

In response, Coles says it will vigorously defend the allegations, and that it is committed to "negotiating fairly and working collaboratively with its suppliers."

"The ACCC legal action concerns a detailed supply chain program implemented by Coles over two years ago as a part of its strategy to develop a more efficient and internationally competitive supply chain. The project involved improvements to both supply chain collaboration and efficiencies in logistics," the company said in a statement.

"It was designed to deliver benefits to Coles, suppliers and customers through lowering costs and improving availability of stock in our stores."

The ACCC's action appears to have had little to no effect on the share price of Coles's owner, Wesfarmers, which was up 0.4 per cent to $43.23 by 11:43am (AEST), only just trailing gains for main rival Woolworths.