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'Loading,' key issue for General Mills, has long history
by Bill Catlin, Minnesota Public Radio
February 15, 2004

University of St. Thomas accounting professor Brian Shapiro says the case is centered on whether General Mills should have disclosed more information about sales trends. (MPR Photo/Bill Catlin)

Golden Valley-based General Mills faces possible civil charges by securities regulators in connection with its sales practices. The company has been accused of improperly shipping excessive amounts of its products to supermarkets in order to show higher sales. A common business practice to boost sales is coming under greater scrutiny by regulators.

St. Paul, Minn. — It goes by different names: "channel stuffing," "sales loading," "trade loading," or just plain "loading." They all generally refer to the same thing: sending customers more product than they may need or want, usually with some incentive to take it.

Joseph Cavinato, a senior vice president at the Institute for Supply Management, says loading typically happens when a manufacturing firm is coming to the end of a quarter, it has to report results to investors, and sales are slower than goals.

"They will then go out and offer major customers great prices to buy early, so that they can ship the last week of December, for example, and then post that to sales," says Cavinato.

The company wants to ship before the end of the month so it counts towards that quarter's sales. Cavinato says the practice has been going on for 50 years and a lot of companies do it.

Channel stuffing ... for the most part is perfectly OK. The only real trouble is how you account for it. - Ed Ketz, accounting professor, Penn State University

Penn State University accounting professor Ed Ketz says for the most part, channel stuffing is OK.

"The only real trouble is how you account for it. You are not supposed to put something into the income statement as revenue unless you have provided the good or service," Ketz says. "And in the case of channel stuffing, you are providing the goods, but the customer may send it back to you." No problem with the right accounting. But the wrong accounting can lead to big trouble -- multi-billion dollar troubles.

The pharmaceutical company Bristol-Myers Squibb is under regulatory and criminal investigations. The company admits certain shipments were wrongly counted as sales -- $2 billion worth over three years. The issue was not returns, but whether the incentive terms meant the company still owned the excess product, even though it had been shipped to customers. Securities regulators are concerned about channel stuffing because it can mislead investors about the health of a business. In the case of General Mills, two people with grievances against the company have made allegations about loading to the Securities and Exchange Commission.

Jeff Millard, a former manager who is suing over his firing, says the company shipped supermarkets as much as an extra 16 weeks of cereal and other products. Millard's lawyer David Rodgers says some supermarkets didn't want extras.

"Some of the General Mills account executives would offer to pay those supermarkets money to take those shipments. And the number I've heard is that in some instances was that there was $2,000 per truckload," says Rodgers.

A General Mills spokesman says there's nothing wrong or abnormal about such payments. He declined to be recorded for broadcast. But he says from time to time the company offers promotions and discounts as incentives to its customers.

Accounting professor Ed Ketz says such payments are not necessarily a problem, so long as the accounting is proper. General Mills has repeatedly said its sales practices and related accounting are proper.

Millard says a year ago, loading was aimed at shoring up the company's stock. The company was facing a large payment, with the amount determined by the share price. The month before it was due, General Mills reported a big increase in quarterly cereal shipments. Officials said a new product was the biggest factor. But they also said sales were slowest at the end of the quarter -- opposite the typical loading situation.

General Mills' few statements about the issues essentially deny selling customers more than they want or need. The company says it does use the term loading -- for programs to increase supermarket inventories, which can lead to more sales to consumers. The company says it uses loading when launching new products, during peak promotion seasons like the holidays, and to help meet quarterly sales goals.

General Mills says the possible civil charges involve its sales practices and related disclosures -- the information available to investors. University of St. Thomas accounting professor Brian Shapiro says the SEC may believe the company should have said more about the increase in cereal shipments a year ago.

"Is this a one-time event? Is this recurring? Are these trends reasonably expected to persist into the future? If an investor believes that this trend is likely to continue, this could artificially inflate the stock price," says Shapiro.

If such omissions are the issue, Shapiro says it would be a relatively minor transgression -- a two, he says on a scale of one to 10. However, the SEC has yet to specify its concerns.

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