Channel stuffing is the practice of sending more goods to distributors and customers than they currently need. A seller engages in this practice to artificially boost its reported sales and profit levels, thereby deceiving anyone reading its financial statements. A short-term outcome of this practice may be a boost in a seller’s stock price, or perhaps its management team attaining a performance-based bonus. Channel stuffing has the following negative effects:
Customers may have been promised the right to return the excess amounts purchased, so the seller experiences heightened sales returns. If these returns occur months after the ship date, the goods may by then be obsolete or damaged, and so cannot be resold.
The seller may have boosted its production capacity in order to manufacture the increased volume of units, after which its capacity requirements will likely fall, until the excess units have been absorbed by the market. The result is a prolonged period of production overcapacity.
In short, channel stuffing accelerates the recognition of sales and profits that would normally have been recognized in future periods, thereby effectively reducing the sales and profits in those later periods.