Sunday, July 6, 2008

Coca-Cola settlement

Eight years ago, a group of investors sued Coca-Cola, alleging that it had been forcing some of its bottlers to buy millions of dollars of excess beverage concentrate.

Why would it do that?

This allegation involves a faux-accounting practice known as "channel stuffing." Wherever there is a "channel" between the seller of a product and the ultimate buyer, there is a temptation on the part of the seller to push more product into that channel than there is any good reason to believe the ultimate buyers will accept. The whole of the amount pushed into the chanel is then credited as sold on the books, listed as part of the asset known as "accounts receivable."

Why would a seller do that? Because dressing up the accounts receivable in this way makes the books look good, making the company seem more valuable to credulous investors, helping thereby to boost the value of the stock.

There are a range of reasons why a company wants to see higher prices of its stock, but I'll assume here that explanation is unnecessary.

The key point here is that channel stuffing is a self-defeating strategy. The retailers can't sell all the product that has been sent them and generally return it to the wholesaler/manucaturer, who eventually has to readjust his accounts receivable, bursting whatever stock-price bubble the tactic might have created. It is tempting chiefly to managements who aren't looking that far ahead, and accordingly the (alleged) prevalence of the practice is often cited as evidence of the obsession of contemporary corporate managers with quarter-by-quarter numbers, with meeting their projects for THIS quarter and damned be the consequences.

Anyway, the institutional investor, Carpenters Health & Welfare, was the lead plaintiff in the lawsuit against Coca-Cola filed in October 2000. The company has made no admission, either pursuant to this settlement or pursuant to the settlement of a civil enforcement action brought by the SEC, settled three years ago.

Frankly, I don't think that short sightedness is the besetting sin of contemporary managements. They do have sins, but that one wouldn't be high on my list thereof. Accordingly, I suspect that the practice of channel stuffing isn't all that prevalent. That's probably why this is the first time I've mentioned the practice, or even allegations thereof, in this blog.

Still, I suspect I'll have reason to mention them -- such allegations -- again.

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