A few thoughts on channel-stuffing

I've seen several articles recently alleging that General Motors has engaging in channel-stuffing -- shipping out more cars to dealers than the dealers could sell -- in the months preceding their IPO. I have no idea if it is true, though the graph accompanying this blog post would seem to provide some evidence to support the idea -- though it may also merely be proof of poor forecasting (another point of some interest, of course).

Regardless of the merits of the charge against GM, something that I notice is that such charges are being made with more frequency, to the point that the term 'channel-stuffing', once used only among channel marketers, has become fairly common.

Channel-stuffing has always been a stupid tactic, in my opinion, at least for the company involved, though not necessarily for individual employees involved. (The employees may benefit from incentives based on short-term sales goals, and figure on having moved on to another position before the consequences hit). But the growing knowledge of the practice among the general public (read, 'customers') and the frequency with which the charge is (fairly or not) being leveled, means that companies can suffer a PR hit -- whether the real problem is channel-stuffing or bad forecasting. A good reason to avoid both, it seems.

What do you think? Is channel-stuffing just commented about more these days, or has it actually becoming more common?

Are GM and Chrysler stuffing the channel?

There are indications that General Motors and Chrysler, in an effort to make their sales figures look better to the Feds, are using incentives to push car dealers to accept unrealistic shipment levels. If so, this is classic channel-stuffing.

AutoNation, the largest dealership chain, is resisting:

GM and Chrysler "have implemented wholesale incentive programs where they basically say to get the incentives for the inventory you want, you have to buy more inventory," AutoNation Chief Executive Mike Jackson said Thursday in a conference call to discuss fourth-quarter financial results.

"I think this is the wrong thing to do," Jackson said. "We are not playing that game."

[...]

"The channel is full, and they are trying to stuff more in," he said.

The manufacturers want dealers to order as many cars as they did last year, but AutoNation is forecasting a 24% sales decrease.

Channel-stuffing in a recession

I had meant to write a post speculating that we might see an increase in channel-stuffing as the economy dropped off and some desperate manufacturers looked for ways to make their numbers. Channel-stuffing is always a stupid idea, but even smart people can get really stupid when they panic.

I was basing my thinking on a couple things I had read in which some small to mid-sized retailers indicated that they were being pressured by their vendors to take on more fourth-quarter inventory than they felt they could sell.

Here's an opposing view, based on something I hadn't considered -- the credit crunch might make the channel impossible to stuff, even if the retailers were willing:

Will there be an increase in the level of channel stuffing that occurs if vendors are under pressure to compensate for softer markets ... ?

I don't think so because stuffing happens when there is credit available. If there is less credit it will be cleaner. Banks and insurance companies will have reduced the credit and so I think you'll start to see the real players emerge that are committed to the business and have their own capital investment.

The people who used to make money in between as the second or third intermediaries will be wiped out by the credit crunch, which will improve the profitability of real customers.

The Euphemism Hall of Fame

The former CFO for Bristol-Myers Squibb is on trial for alleged channel-stuffing, and this article tells us that the judge has narrowed the government's case. Good news for the defendant, but what attracted my attention was this part of the story:

Defense attorneys plan to argue that this is not “channel-stuffing,” but rather a business strategy for “selling ahead of demand ...”

Oh, it was just selling ahead of demand -- why didn't you say so? That makes it all OK!

Former CFO at Network Associates convicted

Today, I feel like I'm the local crime reporter. In addition to the US Foodservice guy below, we also had the former CFO of Network Associates convicted last week, again for playing accounting games relating to trade promotion allowances -- in this case, channel-stuffing.

According to court documents, Goyal allegedly caused Network Associates to make payments to its distributors disguised as discounts, rebates and marketing fees to convince the distributors to engage in channel stuffing

After the fraud, which cost the company more than a billion in market capitalization, the company was renamed, and is now called McAfee.

Channel-stuffing at Snapple?

An attorney for sixty distributors suing Snapple (a division of Cadbury) says that an internal study reveals that the company has engaged in channel-stuffing.

A study ... Snapple Beverage Corp. has presented in court "apparently establishes" that the company used questionable distribution practices to meet a sales quota, a lawyer for 60 distributors suing the company said in a recent letter to the judge.

The letter by Howard B. Cohen to U.S. District Court Magistrate Judge Mark D. Fox says the study seems to show Snapple "engaged in a pattern and practice of channel stuffing. ..." The letter says the study - which is not part of the court file in White Plains - also seems to show that the company sold product at greatly reduced prices to certain distributors - but not to those who brought the lawsuit.

We all know that a great deal of channel-stuffing occurs in every product category, but the increasing frequency of legal action involving the practice is beginning to make it extremely dangerous (in addition to short-sighted and stupid, which it has always been).

Ex-CFO charged with channel-stuffing

The ever-popular gimmick of channel-stuffing has found another victim. The Securities & Exchange Commission has "charged the former chief financial officer of Lantronix Inc. with orchestrating a scheme to inflate the company's financial results for fiscal 2001 and 2002."

The SEC said that Cotton ... orchestrated the scheme, which involved deliberately booking revenue and delivering products to a distributor before orders had been placed, violating accounting procedures by booking revenue from orders that gave distributors expanded rights to return unsold products.

Piling on Estee

I came across a news item the other day, announcing that a law firm was filing a class action against Estee Lauder for channel-stuffing. Since I had posted an item about that two weeks ago, I went back to the old item, but noticed that the law firm was different. So I checked Yahoo, doing a search for "estee lauder channel stuffing" and found that at least six firms have announced such actions.

It seems that suing folks for channel-stuffing is seen as a potential hot area in the legal community.

Weekend quick notes

General Motors is looking to dump its share of Isuzu. This marks an almost complete pull-out from Japan -- they had big investments in Suzuki and Fuji (Subaru), but have sold all or most of them. But right now what they need is cash.

Estee Lauder is about to get hit with a class-action for alleged channel stuffing last year, according to this law firm's press release: "... defendants launched a largely successful campaign that employed channel stuffing and the dissemination of materially false statements to prop up ... the Company's share price."

Alcatel is buying Lucent. The merger will give Alcatel a significant presence in the US: "With about one-third of revenues coming each from North America, Europe and Asia ... the new company will have a geographic reach few competitors could match, likely forcing other mergers."

Channel-stuffing as an investor's issue

The Motley Fool has an interesting article on channel-stuffing from an investor's viewpoint (they call it "stock doping" as a play on the Olympic issue of "blood doping"). The article focuses on Bristol Myers Squibb and on drug wholesalers, but points out that it crosses all industries:

I needn't pick on merely Bristol-Myers Squibb, which has had a change of management since these past events, or the major wholesalers, which have done nothing wrong as far as I know. Just last month, McAfee finally settled charges relating to (among other things) channel stuffing that dated back to its days as Network Associates. The issue cuts across industries.

Coke: Channel-stuffing and channel conflict

Coca-Cola's biggest bottler and subsidiary, Coca-Cola Enterprises, has been hit by a combo insider trading and channel stuffing lawsuit, alleging that a consultant and former top executive sold his stock knowing that the stock price was inflated by channel-stuffing.

The claims mirror those filed previously against parent Coca-Cola Co. That case is still pending. According to the new complaint filed in Atlanta: "By concealing CCE's rampant channel stuffing activity, defendants failed to disclose the existence of known trends, events or uncertainties that they reasonably expected would have a material, unfavourable impact on net revenues or income."

To add to the misery in Atlanta, a group of fifty independent bottlers have filed suit against Coke's plans to sell Powerade direct to Wal-Mart.

Coke bottlers fear the move would violate their territory exclusivity and make it easier for the company to move to warehouse distribution with other products. They also contend they’ve had a contract with Coke since 1994 that prohibits warehouse delivery of Powerade to retailers.

Classic channel conflict.

Update Thursday: Here's a more detailed report from Coke's hometown paper, The Atlanta Journal.

Morgan Stanley analyst Bill Pecoriello said the rift is broader than just PowerAde and Wal-Mart.

"While the PowerAde test with Wal-Mart is small, the bottlers worry that other retailers will be next and other product categories will follow, threatening their future relevance," Pecoriello said in a report. "Coke might have to resolve this issue through additional compensation to the bottlers or other structural changes."

Channel-stuffing

A few years ago, it seems like nobody knew what channel-stuffing was -- I remember having to explain the term. Now it seems to be not only well-known, but a popular basis for class-action lawsuits. I've come across two recently:

In this one, a law firm is soliciting people to join a suit against Amkor, a $2b chip fabricator:

"... the Defendants failed to disclose the following materially adverse facts to be market: (1) that the Company was shipping inventory to customers far in excess of customer demand; (2) as a result of this deliberate channel stuffing, the Company undermined the future demand for its products ..."

And here, a federal appeals court reinstated a suit against Tellabs, a $2b telecoms equipment maker:

In fact, the suit alleged, Tellabs was shipping Titan 5500 products that hadn't been ordered--a practice called "channel stuffing"--in order to inflate the company's sales revenue.