Thursday, July 10, 2008

Channel-Stuffing Lawsuit Settled for $137.5 M

Settlement - Coca-Cola recently announced that it has agreed to settle a class action shareholder lawsuit for $137.5 million, as reported by the AP, Reuters, and WSJ. The suit alleged that Coca Cola had artificially inflated its earnings in 1999 by forcing bottlers to purchase hundreds of millions of dollars in unnecessary beverage concentrate at the end of a reporting period in order to make its sales seem higher. As reported in this article, Coca-Cola settled a similar issue in 2005 over the sales of excess beverage concentrate to bottlers in Japan between 1997 and 1999.

Legal Risks - Most consumer packaged goods corporations are publicly traded and face intense pressure to meet earnings expectations at the end of reporting periods. "Channel stuffing" or "trade loading" – the practice that Coca-Cola allegedly engaged in – sometimes occurs as publicly traded corporations try to meet (or exceed) earnings expectations or a sales force tries to meet sales quotas. The Securities Exchange Commission has previously prosecuted manufacturers that have engaged in channel stuffing and retailers that have participated in schemes to help manufacturers artificially inflate sales. The government has also indicted executives that engaged in channel stuffing as reported here. Industry stakeholders should be aware of the risk of initiating or participating in activities that can be perceived as a channel stuffing scheme.

Business Issues - In addition to raising legal concerns, channel stuffing is simply bad business. It creates supply chain inefficiencies, creates inventory backlogs, and often diminishes manufacturers' margins (as substantial discounts are often required to generate sales surges). Moreover, once a channel stuffing practice is initiated, it's difficult to stop: a surge in sales at the end of one reporting period is typically followed by soft sales in the following period as wholesalers and retailers work to sell-through expanded inventory.

The Coca-Cola securities case is captioned Carpenters Health & Welfare Fund v. Coca-Cola Co., No. 1:00-cv-2838 (N.D. Ga.). The order approving the settlement is available here; a 2004 order partially denying a motion to dismiss here.


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