Channel stuffing is not evil

22 Nov 2012

There is a scene in the film Casablanca where Claude Rains, the corrupt French police chief, is gambling in Rick's Bar. A singing match breaks out between German troops and French civilians.

The French sing La Marseillaise, which is bannthinkstock-seasoned-stuffinged under German occupation so Claude Rains gets to his feet, and announces that the bar is closed immediately.

"How can you close me up?," says Rick (Humphrey Bogart). "On what grounds?"

"I am shocked," says Claude Rains, "shocked to learn that gambling has been going on here."
One of Bogart's employees then arrives to hand him his winnings.

I was reminded of this scene by a paragraph in the Financial Times about the row between Hewlett Packard and the former management of Autonomy, the software business HP bought last year.

A second claim levelled by HP, said the FT, concerned sales made through intermediaries known as "value -added resellers". Some of these sales had been booked as revenue by Autonomy even though there had been no end customers for the deals, it said - a practice known as "channel stuffing".

The thought of HP's top management trying to imply that they have never heard of a practice known as "channel stuffing" had me chuckling all afternoon. 

When I meet new people, I often tell them about distribution so they can understand Widget's business. I tell them that, in simple form, a distributor buys goods from manufacturers (or "vendors") and sells them into retailers and resellers. After hearing this explanation, many people then ask me why the vendors do not just cut us out and go directly to the retailers.

Of course, some do. But many vendors choose to use distribution. There are many good reasons for this. Distributors break bulk - we buy in large loads and sell in smaller quantities. Distributors have stock on hand in their territory, so we can refill customers at short noMark Needham is chairman of Widgettice. Distributors will have existing trading accounts with the retailer or resellers which vendors want to reach. Smaller distributors like Widget also tend to have an area of expertise which vendors need. In our case it is developing markets for new consumer products.

Although everyone knows that it is bad for long term business, technology vendors who are traded on public stock exchanges, particularly Wall St, are under intense pressure to meet sales quarterly targets. Vendors also tend to make high gross margins which give them scope to offer better prices or special bonuses.

Distributors on the other hand tend to make low gross margins but are often large enough that a bit more stock is neither here nor there. At the end of a quarter the two different types of businesses often find that deals can be done.

Too many such deals can ruin a market, but in when done in moderation distributors can make a bit more profit by helping manufacturers manage the peaks and troughs of their business, and the world keeps on turning. It is not a new or evil practice nor one which can be unfamiliar to the management of a top technology vendor.

Mark Needham is chairman of consumer electronics distributor Widget

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