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Channel Stuffing Definition
Channel stuffing is a practice in business whereby a seller or a company sends more goods to a distributor than what he is capable of selling. This practice entails stuffing a distribution channel with more goods than what the channel can naturally sell. Channel stuffing is a fraudulent practice used by a salesperson or company that wants to increase its sales figures and thereby inflate its earnings.
Sometimes, a channel stuffing can be targeted to customers, this is sending a customer more than he actually needs or more than what he demanded. Companies or sales forces engage in channel stuffing when the time for financial reporting approaches.
A Little More on What is Channel Stuffing
Through channel stuffing, a seller or a company can drastically boost its sales and also artificially increase its profit margin, all these are recorded in financial statements. A sales force that wants to meet a particular target in order to qualify for a performance-based bonus at the end of a quarter or a year might also use channel stuffing.
Channel stuffing is a fraudulent practice that entails shipping more goods to distribution channels than what they can naturally sell. Companies and salespersons offer different attractions to distributors to persuade them to take more supply than what they actually need. The attraction may be in the form of discounts, longer payment periods and other incentives.
In the United States, the Securities and Exchange Commission frown against channel stuffing given that it is a fraudulent practice.
Negative Effects of Channel Stuffing
Channel stuffing is a common practice among wholesalers, retailers and many industries. The automobile industry, for instance, is often accused of too much frequency in channel stuffing. Despite the channel stuffing gives an artificial boost to the sale level of a company and temporarily inflates the company’s profits, there are some side effects associated with channel stuffing. The major ones are;
- When retailers are unable to sell the excess products shipped by the company, the excess goods are sent back rather than cash.
- No company can keep up sales rate using stuffing, this fraudulent practice often catches up with a company.
- Long payment terms offered by the seller results in an increase in accounts receivables and working capital.
Here are some important things to know about channel stuffing;
- Channel stuffing is an approach to sales whereby a company or sale force ships excess products to distributions channels more than they can naturally sell.
- Stuffing also entails sending ore goods to a consumer or retailer than what they require.
- Sellers use channel stuffing when to artificially increase sales level and also boost profit margins.
- Regulators such as the Securities and Exchange Commission (SEC) frown on channel stuffing, it is a deceptive and fraudulent strategy.
Example of Channel Stuffing
Channel stuffing is a common practice in many industries, in the pharmaceutical industry, for instance, Bristol-Meyers Squibb, a public pharmaceutical company was engaged in channel stuffing sometime in 2004. Based on stuffing, the company had its profit margins and sales artificially inflated which reflected in the company’s financial statement released quarterly. The SEC took legal action against Bristol-Myers for this fraudulent practice, in the long run, the company spent about $150 million to settle the channel stuffing suit.