Why does CLG not believe in channel stuffing?

When a company forces in more products through a distribution channel than the channel is capable of selling, its sales figures become inflated. The practice is known as channel stuffing or trade loading. The practice of channel stuffing is very deceptive. Retailers are deliberately loaded with more products than they are capable of selling in the market, and hence, the distribution channels become clogged or stuffed.

Channel stuffing is often carried out to meet year-end sales targets. Sales targets are calculated on shipment and, thus, the practice helps to realize short-term sales targets. In the long run, however, it becomes detrimental because it can adversely affect the reputation of the business. Goods are often returned and lower sales are reported in subsequent months because the commodity was oversold previously. The receivables in the accounts show an increase for a short period of time, as sales are higher than normal.

Effects of channel stuffing

• Distributors often need to return the unsold goods to the company. They incur a transportation cost or carrying cost.
• A backlog of product inventory is created in case of channel stuffing.
• The large discounts offered due to channel stuffing can affect the long-term viability of the company.
• Ultimately, the value of the distributor’s sales will be deflated because stores with excess inventory are more likely to send back the surplus to the distributor and less likely to send cash payments.
• Returned goods will affect the accounts and profits of the company. That can create a bad image of the company in the market and, in worst cases, can even lead to a shutdown of the factory.
• It can also be the case that the retailers may not place orders with the company for the next period, owing to the stuffing in the previous period. As a result of this, there can be a shortage in the coming period. Customers faced with such periods of shortage followed by an excess of the same good over a period of time may switch to substitutes during periods of shortages, thereby destroying the loyalty of the consumer to a particular product.

CLG does not engage in channel stuffing. We believe in maintaining and harbouring long-term relations with retailers and wholesalers. This allows us to help brands operate efficiently and grow at a steady rate.

Source:

HTTPS://CORPORATEFINANCEINSTITUTE.COM/RESOURCES/KNOWLEDGE/STRATEGY/CHANNEL-STUFFING/