Channel Stuffing Definition

What Is Channel Stuffing ?

Channel gorge is a deceptive business practice used by a ship’s company to inflate its sales and earnings figures by intentionally sending retailers along its distribution transmit more products than they are able to sell to the public. Channel stuffing typically would take place merely before quarter-end or year-end so that management, fearful of bad consequences to their recompense, can “ make their numbers. ”

Key Takeaways

  • Channel stuffing refers to the practice of a company shipping more goods to distributors and retailers along the distribution channel than end-users are likely to buy in a reasonable time period.
  • By channel stuffing, distributors temporarily increase sales figures and related profit measures for a particular period.
  • Regulators frown on the practice and consider it deceptive. In some cases, legal action can be brought to the offending company.

How Channel Stuffing Works

Channel stuffing refers to the commit of a party shipping more goods to distributors and retailers along the distribution groove than end-users are likely to buy in a fair time period. This is normally achieved by offering lucrative incentives, including deep discounts, rebates, and extended payment terms, to persuade distributors and retailers to buy quantities in excess of their current needs .

normally, distributors retain the good to return any unsold inventory which calls into motion whether a final sale has actually occurred. “ Stuffing ” the distribution channel is frowned upon by the Securities and Exchange Commission ( SEC ) as a drill used by companies to accelerate tax income recognition to reach short-run gross and earnings targets, and as such, misleading to investors .

By channel stuffing, distributors temporarily increase sales figures and relate net income measures for a finical period. This action besides causes an artificial bulge up of accounts receivables. however, ineffective to sell the overindulgence products, retailers will send back the excess goods alternatively of cash to the allocator, who then must readjust its accounts receivable ( if it adheres to GAAP procedure ) and ultimately its bottom tune .

In other words, stuffing constantly catches up with the company, because it can not maintain sales at the rate it is stuffing. Channel thrust is not confined to the wholesale and retail deal ; it can take invest in the industrial sector, high technical school industry, and the pharmaceutical industry a well. Valeant Pharmaceuticals is an crying case of a company found guilty in 2016 of duct stuff .

Channel stuffing accusations have besides been levied against the automobile industry, which sends excessively many new cars to dealerships than need warrants in ordain to inflate sales figures.

This deceitful practice is normally done in an undertake to hit compensation targets or to raise the rate of the stock or prevent its fall upon dismissal of quarterly or annual results.

An example of Channel Stuffing

In August of 2004, pharmaceutical ship’s company Bristol-Meyers Squibb ( NYSE : BMY ) agreed to pay $ 150 million to settle a distribution channel stuffing suit by the SEC .

Court documents reveal the following :

For two years Bristol-Myers deceived the market into believing that it was meeting its financial projections and market expectations, when, in fact, the company was making its numbers primarily through channel-stuffing and manipulative accounting devices. Severe sanctions are necessary to hold Bristol-Myers accountable for its violative coduct, and deter Bristol-Myers and other public companies from engaging in similar schemes. 



Bristol-Myers inflated its results primarily by stuffing its distribution channels with excess inventory near the end of every quarter in amounts sufficient to meet its targets by making pharmaceutical sales to its wholesalers ahead of demand. As a result of its channel-stuffing, Bristol-Myers materially understated its accruals for rebates due to Medicaid and certain of its prime vendors, customers of its wholesalers that purchased large quantities of pharmaceutical products from those wholesalers.

In addition to paying its multi-million dollar ticket, in March 003, Bristol-Myers restatedpior fiscal statements and disclosed its channel-stuffing activities and improper accounting.

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