Tuesday, April 19, 2005

Sing Along With Coke: "I'd Like To Teach The World To Stuff..."

Another one bites the dust.

Now that AIG has been unmasked as a fake-the-numbers blue chip, Coca-Cola comes along and settles SEC charges that "Coke repeatedly inflated sales and misled investors by shipping $1.2 billion of extra beverage concentrate to bottlers in Japan, one of its largest and most-profitable markets, during the three-year period" of 1997 to 1999, according to today's Wall Street Journal story on the matter.

Seems that Coke "stuffed the channel"--a term more common in the high-tech industry, where the HPs and Compaqs and IBMs of the world do their best in the last few days of a nail-biting quarter to ship product out the door in order to book it as "revenue," and thus "make the number."

Channel-stuffing is far more common than anyone on Wall Street would like to think: a friend of mine who came out of the venture capital world found it very hard to invest in any tech company at all. "I know what these guys go through the night the quarter ends to hit the numbers," he told me. "You don't wanna know."

Sort of the business world's version of not peeking into the kitchen of a restaurant if you want to enjoy the food.

In any event, Coke apparently has come clean to a fairly straightforward scam: offering end-of-quarter deals to bottlers in Japan such that the bottlers' inventories jumped 60% over a three year period in which actual sales of Coke only rose 11%.

That's quite a stuff-job.

Quothe the Journal:

"The scheme enabled Coke to meet Wall Street profit targets in eight of the 12 quarters, the SEC said. While the sales technically were legitimate, Coke failed to disclose their existence or financial impact, concealing its full sales and profit condition."

The elephant in the room, of course, is the Oracle of Omaha, Warren Buffett. Buffett, who loudly and publicly demands integrity first and foremost among his co-workers and the companies in which he invests, sat on the Coke board during the entire three-year period in which the company's executives were feverishly stuffing the daylights out of the Japanese channel.

And this was, apparently, not some rogue manager in Japan: "the SEC said Coke executives in Atlanta participated in the scheme."

Does Warren Buffett not know how to read a balance sheet? Did he not wonder how Coke was growing unit sales 60% in an 11% market?

Perhaps Buffett is more easily snowed than anyone would believe: he also served on the board of Gillette, the razor maker which P&G recently agreed to buy, during its channel-stuffing days a few years ago.

As for his recent involvement in the blossoming AIG scandal, Buffett, no doubt, is on the side of righteousness and goodness...but, still, his baby, Geico, was on the other side of the table dealing with a man who appears to be going down hard.

One wonders--after Coke, Gillette, and AIG--if the same brush of scandal that has tarnished all three former infallibles will ever reach the feet of the Oracle of Omaha.

Jeff Matthews

I Am Not Making This Up

2 comments:

Mrk2Mrkt said...

Jeff,

I've been a long time reader, and I began re-reading some of your entries. After reading your Berkshire shareholders' meeting trip report, I was wondering how you felt about the Coke channel-stuffing on Buffett's watch. Any new thoughts about it in light of your experience hearing him in person?

Thanks.

Jeff Matthews said...

Excellent question.

What comes across in the flesh is that Warren Buffett is an exceedingly hands-off owner.

In that light, if managers feel a strong need to 'not disappoint him' as we were told by the executives we met at the shareholders' meeting, it could well lead to situations like Coke and Gillette, in which major earnings manipulation happened under his nose.

How he did not notice what was going on through the balance sheets and cash flow statements is still beyond me, especially after hearing him rip through corporate boards, executive pay and CEO excesses.

My only thought is that the amount of time one spends on an investment declines over a long period of time, and one doesn't deconstruct the numbers as carefully as one does with newer, less familiar investments.

Great question.