The Truth About Channel Stuffing

Bertel Schmitt
by Bertel Schmitt
the truth about channel stuffing

Zerohedge chart shows GM stuffing the channel at a frightening rate

Zerohedge, the website that caters to short sellers, has been monitoring GM for symptoms of a relapse to the Bad Old. One of these symptoms is channel stuffing, defined by Investopedia as “a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public.”

Zerohedge has a chart depicting an increasingly overflowing channel, and it looks bad. Let’s have a closer look.

Zerohedge sees “a near record 743K cars” sitting in the lots of GM dealers in February, – “the second highest ever.”

If you want to come to the defense of the General, you can simply say: “Second highest February, ever? Not true at all! In February 02, 988K were out there. In February 03, dealers drowned in 1.13 million GM vehicles. In February 04, there were 1.2 million – shall I go on?”

Point taken. Those were the days of 17 million units a year, and we all know what happened after the channel got stuffed.

Inventories go up for GM and its peers

Let’s put the matter in perspective by recreating the same chart for GM and its peers. Dealer inventories sure are rising. They rise for all makes, some rise more than others. A simple reason for dealer inventories to rise is that sales are up.

A better, but still confusing picture

To get a grip on this (and on inventories), the industry uses a metric usually called “days to turn” (or “days of sale” etc.). It goes like this: “If business stays like last month, how many days will it take to move the inventory?” Days to turn should not go up as business increases. Sure, total inventory goes up. By selling inventory faster, days to turn should stay relatively even.

In the industry, a two month inventory, or around 60 days, is considered reasonable. As we can see from this chart, GM appears to be far removed from that 60 days ideal.

Days to turn also is a metric that must be used with care. Take GM’s December 1 inventory of 788K. Looking at the sales rate of November, it was determined that it would take 106 days to move. GM did put cash on the hood, year-end sales did their part. On January 1, there was an inventory of 717K. Now suddenly, it would take only 76 days to move that inventory? It would, if January sales pace would be the same as December. Of course it was not. So we land on 738K inventory at the beginning of February, which suddenly is said to take 95 days to turn. Confused?

We are not trying to predict inventory levels, we are trying to establish a trend. For that, we take a simple three month moving average of the days to turn to smooth out the confusing ups and downs.

GM accumulates more and more inventory, while Toyota’s remains relatively flat

This chart is less dramatic than that of Zerohedge, but it tells us a lot. We see that days to turn trend up for all Detroit makers. GM however remains the most profligate inventory oinker. On a three month averaged basis, GM has nearly three weeks more inventory out there than Ford. Of the Detroit3, Ford looks most disciplined, especially considering its high share of trucks. In Febuary, Ford’s three month average for trucks was 77 days, that of cars was 68 days – not a large difference.

I have added Toyota as a reference. With Toyota still importing some 30 percent of the cars it sells in the U.S., one would assume that Toyota’s inventories should be higher. They are not. Quite interestingly, all four of them had inventory levels slightly above 60 days in March 2011. After the Tsunami hit, Toyota’s inventories decreased, but they did not increase a lot in 2012. Lean inventories do not seem to be in favor in Detroit, with GM topping the obesity scale.

P.S.: Before the usual “GM needs to prepare for the truck shutdown” arguments come: In February, GM’s truck inventory stood at 94 days, that of cars stood at 95 days.

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  • Grunt Grunt on Mar 03, 2013

    The inventory of 1500 crew cabs is a large contributing factor to the current days supply. It is the first model of Silverado to be transitioning to the new body style 2014. It is also the highest volume model in the Silverado lineup. I am the inventory manager of a Chevy dealership that sells about 60 to 70 new Chevrolets a month, the vast majority of which are trucks in that out of that number we may average 5 cars a month. We essentially ordered about 5 months worth of those in a 2 month cycle. When starting up a new product the ramp-up is slow so those will carry us through the lean start-up period. They have had big cash on the hood and will continue to do so til they are gone. We will be just fine though my availability of 1500 crew cab is currently about 150 days that number will plummet over the next several months as we sell down and wait on them to ramp-up production of the new one.

    • See 2 previous
    • Highdesertcat Highdesertcat on Mar 03, 2013

      @Grunt LOL! Bobby Jindal country. I actually enjoyed the meetings. If for nothing else but the socializing and talking to others, exchanging ideas and trying new approaches. My brothers competed in the brutal Houston and Dallas areas, and in three other states. Thought you might have been from the Waco and/or San Antonio area. Sorry.

  • Jkross22 Jkross22 on Mar 04, 2013

    As someone who thought the bailout was all bullshit, I'm at least glad to see GM making money*. *By making money, I mean wiping out debt and then trumpeting their tremendous turnaround and making boatloads of money. I'm sure most US households would be hunky dory if Uncle Sam came in, forgave all forms of consumer debt and allowed us to carry forward tax credits and bid us adieu. But I digress.

    • Doctor olds Doctor olds on Mar 04, 2013

      They'd probably let you carry forward some tax credits, too, if you were going to pick up much more in pension liability in exchange. In 2012, GM disposed of $29B of that liability, a small fraction of the total pension obligations the new company did take on in exchange for those credits. The tax credits are not a free lunch.

  • MelanieRichardson GOOD
  • El scotto @jwee; Sir, a great many of us believe that Musk is somewhere (pretty high) on the spectrum and move on.I work on the fringes of IT. Most of my presentations get picked over extensively and intensely at meetings. I'm smart enough to know I'm not that smart and willingly take advice from the IT crew. I bring them Duck Doughnuts too. We also keep a box of Crayolas in the meeting room.At one meeting an IT guy got way into the details of my presentation, the meeting went long as we discussed my target audience. Same IT guy insisted it was a disaster and would fail miserable and that I was stupid. Yeah, F-boms get dropped at our meetings. I finally had enough and asked if he was such an expert, did he want to stand up in front of 30 senior executives and give the presentation? His response was a flat "NO". He got the box of Crayolas. For you non-military types that means shut up and color. Musk is the same as that IT guy, lots of gyrations but not much on follow-through. Someone just needs to hand him a box of Crayolas.
  • FreedMike The FJ Cruiser would be a better comeback candidate. The gang back at Toyota HQ must be looking at all those Broncos flying off Ford lots and kicking themselves.
  • Tassos 2015 was only 7 years ago. $58k is still a whole lot of $ to pay for a vehicle. FOrtunately one can buy a flagship vehicle with great active and passive safety for half this amount, if one does the SMART thing and buys a pre-owned luxury flagship vehicle. they have historically been SCREAMING BARGAINS. A breadvan on stilts SUV, wether the more compact Macan or the more bloated Cayenne will never pass as a Flagship Vehicle. No matter how well it drives or how reliable it suprisingly is. It still is a breadvan on stilts.
  • Sean Ohsee Bring back the 100 series and its I6 diesel.
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