Channel stuffing, also known as trade loading, is an illegal business practice used by companies to blow up their sales and earnings figures. It is the ponzi practice of sending more products through its distribution channel than the distributors/retailers can sell. When the products are shipped from the company, they may be considered as sold and may be used to boost the figures.
Companies can do channel stuffing for various reasons like,
- Painting the fundamentals like sales and earnings figures; to get better stock prices and media attention.
- To meet up with competitors’ (or its own previous) performances or targets.
- To highlight/paint its performance over a specific channel like international trades or a specific product.
- Poor sales force management can also be a cause; trying to meet-up the long-term target in a short-term.
Channel stuffing can be regarded as a short-term practice with long-term consequences.
- As more products are shipped, the distributors tend to return the unsold ones or stop giving further orders; thus the future figures get worse.
- Creating more products for channel stuffing can demand factory overtimes, and returning unsold products or lack of orders can result in factory shutdowns.
- The fundamentals can become less and less attractive and can adversely affect stock prices.
- The marketing and selling of products become more and more complex and unmanageable.
Many companies regardless of their size have been identified and criticized for their channel stuffing activities. In the U.S., the Securities and Exchange Commission has litigated some companies for these activities.
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