Tuesday, June 29, 2010

Stuff the trade

The news yesterday that two former executives of Bristol - Myers Squibb (a pharmaceutical giant) have had prosecution charges dropped against them, spurred this post. These two were top executives 5 years ago and apparently indulged in “channel stuffing” – the practice of dumping stocks into the wholesale or retail trade in order to show higher sales for a quarter or a period. As happens with such practices, if taken too far, one day they catch up with you. In the case of Bristol-Myers, it did and they had to publicly state this and their stock market value fell ; this was what led to the attempt at prosecuting these two executives.

Every consumer goods company in the world does this, to some degree or the other. Consumer goods companies do not sell directly to the end consumer, which is you or me. They sell to a complex distribution chain – wholesalers, retailers, etc etc. What they show as sales in their books is what they sell to their first link in this distribution chain . Its quite possible to give high discounts and sell large quantities to show higher sales in the books, although retail consumers are not buying any more or less. But then, come next quarter, this is sitting like an albatross around your neck – so you have to do even more just to keep the story going. It all swells up, until one day it becomes too much and the company goes public saying this has happened and take a “one time correction”. And promptly start the cycle all over again.

It had gone to such ridiculous extents in the past that factories needed to be set up to cater to this “peak demand”, only for them to sit idle after the dumping was over. Wholesalers were setting up warehouse capacity to hold these “dumped stocks” , which were entirely unnecessary. This practice has come down a bit after giant retailers such as WalMart and Carrefour who buy direct from the manufacturers, survive on lean supply chains and refuse to go along with such nonsense. But it can still be done in a lot of places with lots of people.

You would think that companies stuffed with bright people would see through the idiocy of this and not do it. You can win only in one quarter or perhaps a few – it will very obviously catch up with you. But then the irony is that the more the number of bright people in a company, the more this happens. It would be rare to find a company in the world that doesn’t do this in some form or the other.

That doesn’t make it a fit case to prosecute people as they have attempted to do in Bristol Myers. This is not a case for prosecution. Stupidity in business is not a crime. Trying to make a case by saying that they mislead investors by reporting higher sales is stretching it a bit too far. It’s the Board and senior management that has to watch over epidemics of imbecility that sweep companies from time to time. And if they don’t do their job, they will get sacked in due course.

Next time you buy a product and find its manufacturing date well into the past, you know what’s been happening ……