Title: The Future Of Firearms Distribution
Author: Andrew Molchan
Date: Sun January 15th, 2006
(January 12th 2006, Fort Lauderdale) I’m very good at seeing into the future. What happens with 99% of everyone in a society is they become over culturated to the point where only children, and aliens, can clearly see that culture’s future. For whatever reasons, God gave me the mind of an alien.
This is why in 1964 I could see America would lose the Vietnam War, and said so publicly. All the Generals, Admirals and “strategic planners” in the Pentagon and White House had too much information and couldn’t see the forest for the trees. Some 36 years later, nothing had changed. I could see the Iraq War was a set-up. The Pentagon’s “strategic planners” were wrong, as usual, because they are too close to the small issues and overly inculturated into their system. Strategic planners inside the Pentagon “find” what the Generals and Admirals want them to find, and the top brass is all living in the past.
I’ll take a little side road trip and clue in the Pentagon’s so-called strategic planners. Not that they want to listen, and not that they will have the courage to tell the top brass what it doesn’t want to hear, but, what the hell. I’ve been correctly telling the power structure the unwanted truth for over 40 years so why stop now?
Pentagon planners, here is your 21st century military planning challenge. How do you defeat an enemy who has no borders, no central capital city, no parliament, no national currency, no easily definable army, navy or air force, and no easily definable people?
Believe it or not, I have the correct solution to the above problem. It does not involve killing people or spending a lot of money. It’s the only solution, however, it’s not the American power structure’s “accepted” solution. It’s not inside of the steel box. The difference between open minded people and steel box people is open minded people can learn from history and logic, but steel box people have to first get their teeth kicked down their throat. So, we’ll just have to wait until after the next 9/11.
The overall problem in America, from top to bottom, is a desire to return to yesterday. All things considered, this is a natural desire in 2006. From 1944 to about 1975, America was king of the world. America was the only real winner in WWI and WWII, so America’s preeminence started in 1918, and became colossal in 1945.
Today, America is a classic empire in classic decline. America is going from THE world power, to one of the world powers. In 15 years the EU will be financial bigger than the USA. Ten years after that China will be as financially big as the USA. Japan will still be big, and more militant, and India, Russia, Brazil and the collected Muslim Middle East will be significant players on the world market.
Total world oil production is peaking right now. The availability of oil will decrease, slowly at first. The price of oil will rise up, also slowly at first, and there will be wobbles downward for a while. However, the “lows” for gas will never get down to past lows, but the highs will all be new highs. Modern American culture (and business) was built around cheap gasoline, and it will significantly change over the next 30 years.
The relative economic decline of 60% of America’s citizens will be a harsh reality when it’s no longer impossible to ignore. A big percentage of America’s current “living standards” are today maintained via massive borrowing of every kind at every level. Today, many people in America want to believe yesterday will soon return, and everything will be “normal” again. They also want to believe that in some magical way all the debts will either disappear, or magically be paid for by some other people living on the dark side of Mars.
Current overall American political discussion is 80% delusional. The Democrats in particular are totally out of it. When Hillary runs for President in 2008 her campaign will be built around, Vote for me and everything will go back to the way it used to be. The Washington DC power structure sincerely believes yesterday will return.
In my thought process, I pealed away all the onion layers of the Iraq war. In the very last analysis, the Iraq war is an attempt to make yesterday work. It’s an attempt to avoid dealing with the reality. Washington’s power structure is like the rest of America, it’s saying, “If we all just co-operate in believing it’s still 1976 than magically it will be 1976.”
Our industry has the same wish for yesterday as most of American society. If we “all cooperate together” yesterday will return.
I see the firearms industry as still in the 1970s for distribution. It was an excellent system in 1970, but not so good in 2006. Most of the distributors are great people, and good Americans. However, events are overtaking everyone, in every industry. We can’t live in a graveyard.
Firearms distribution, as it stands today, came into effect in the 1960s. Back in the early 1963s, UPS still didn’t deliver to all of America. Personal computers weren’t even thought about outside of science fiction. Only big companies had IBM computers, old main-frams that ran on big mag tapes. A long distance call from New York to California cost $1 a minute when you could buy a nice house of $17,000, or a new VW or $2,200.
Let’s look at the facts. Let’s say there’s a gun make, Manufacturer X (X or short). To keep it simple, X makes one handgun for $400 suggested retail.
There are about 30 distributors. So X “wants to be efficient” and has only 15. X has a warehouse, and X pays real estate taxes, insurance, liability insurance, maintenance and so forth. He ships guns to each of the distributors. Now, X is paying real estate taxes, insurance, liability insurance, maintenance and so forth on 16 warehouses!
So, Mr. Stocking Gun Dealer has a customer who wants to buy one of X’s guns. Unfortunately, there are still thousands of stocking dealers who sincerely believe that the essence of being a good retailer is getting the gun for the very lowest price. Mr. Dealer is going to use the 800 numbers, and call every one of X’s 15 distributors.
Inside of America, having people on the phone is a minimum $21 an hour in direct costs. It’s salary, phone costs for 800 numbers, FICA, workman’s compensation, building costs, electricity, heat, air conditioning, etc. etc. I’m assuming no paid vacations, health insurance or co-op retirement programs. If you’re on the phone you’re paid, if you’re not, you’re not.
It cost General Motors an average of $38 an hour, per employee, using accurate accounting. This is one of the reasons why General Motors is headed for bankruptcy.
So, the phone people at the 15 distributors are costing 35 cents each, a minute, in direct costs. Those costs in America will only go up. The dealer calls all 15 distributors. He talks to a person on the phone, there’s a little small talk, the phone person has to look up the gun on the computer and tell the dealer. Total average time, 2 minutes. So it’s two minutes times .35, or .70 cents per call, times 15 calls, $10.50 in direct-costs.
In addition, X is paying for 16 warehouses. X is like the rest of America, he believes somebody on Mars is somehow magically paying for everything, but not him. The distributors have to pay for those 15 warehouses, plus everyone else’s salary. The distributor cost of the gun was $300, and they add on 8%, or $24. Perhaps the distributor is making 2% net? This makes the distributor very weak, and a real danger to the system.
So, it cost manufacturer X $24 to ship one $300 gun from his warehouse to the dealer. There are 16 different billing departments, inventory procedures and payment plans. With most sales, manufacturer X will wait from 30 to 90 days for payment, sometimes much longer because some distributors are surviving mainly on “cash float” from their suppliers. This is not healthy for anyone.
What we have is a long, complicated system, with a lot of duplication, and unneeded competition that drives up prices and drives down profits.
If you only think about how to make the past live again, you keep running into graveyard walls. However, if you think about future possibilities, then all kinds of doors open.
Someday, a distributor, or two or three might combine, or a major manufacturer, or two or three manufacturers. They will go to the representatives of the Indian IT companies in America. An Indian IT company can provide 24 hour, 365 day a year, phone order taking processing from anywhere in the world. The Indian IT companies have real costs of $3 an hour, or less than 1/3 of cost of the same service in the USA, and the Indian service is 24/7, and to the world.
The part that’s missing, and needed, is paying for orders via business credit cards. American Express is experimenting with no interest, and low interest business credit cards. If the “big boys” insist on electronic payment, retailers will have to do it. It’s time for some real leadership from the top.
The advantage to the dealer is he doesn’t have to write checks, and has a provided record of all his purchases. He also buys the same guns for less money the gun manufacturer’s sales costs are cut by more than half. The massive advantage to manufacturer X is credit cards are credited to his account that day. Manufacturer X is no longer a bank to his 15 distributors, and he no longer has a fortune setting in somebody else’s warehouses. This makes the total industry safer.
Since there would be only one supplier to the retailer, that would end wholesale price variations. The manufacturer would know all his customers. If X needed a loan, because of a cash flow problem, he could directly discount his own guns, and with payment via credit card, have the money he needs in one or two days.
We in the gun industry are pretty much locked in as far as product is concerned. We are like steam locomotive manufacturers, for big changes we are pretty much at the end of fundamental changes. Even if we could make a laser gun that killed things, politically we couldn’t sell it. We can make product changes, but nobody is going to make a product home run with the bases loaded. However, there is room for massive improvements in distribution.
The collected gun industry concentrates 98% of its energy on product changes where possibilities are very limited. While almost totally ignoring distribution/sales/marketing opportunities where a home run with the bases loaded is doable.
Look at Sam Walton, what did he invent to make several billion dollars and turn Wal Mart into one of the richest and most powerful companies in the world? Sam did NOT invent discounting. 5000 years ago in the camel sales yards of Babylon, retailers were “discounting.” A 1000 years ago, in the medieval fairs of Europe, retailers were “discounting.” Sam Walton definitely did NOT invent “the big box.” When I was a kid, in the 1950s, Sears and Montgomery Wards had stores that were bigger than the biggest Wal Marts today. Department stores like Field’s, Carson’s and Goldblatts on Chicago’s State Street, and Macy’s in New York, were bigger big boxes than any Wal Mart is today. What Sam Walton “invented” was modern distribution. Sam took old, clunky distribution patterns, like our gun industry still has, and stream lined them. Sam Walton invented modern distribution, and made billions of dollars.
Catalogs are also obsolete, and old technology. They can cost from $2 to $6 EACH! Catalogs should all move to the internet. Wal Mart doesn’t have a printed catalog. Microsoft doesn’t have a printed catalog. Apple doesn’t have a printed catalog. Are you bigger and grander than they are? Expensive printed catalogs are yesterday.
Yes, I know, the landscape is littered with wounded people who over the last 8 years paid a fortune for websites that were crap. I remember 40 years ago, and how many times I saw an advertising agency make duplicates of four color film for $40 total, and then bill their client $400. The client paid because they didn’t understand the process of what was happening. In the 1990s the same thing happened with the Internet.
People still tell me they only want to do business with real business people. Well, what better way than to only have an Internet catalog? If a person doesn’t have a computer with an Internet connection, then they are not part of this century.
Internet catalogs can be changed at any time. They are accessible around the world. Combine your Internet catalog with the Indian IT service mentioned about, and you are a worldwide business. What our industry needs is a central “standards” group for Internet catalog layout and design. Everyone can have the same basic layout, and Internet construction prices would be standardized and kept low.
The firearms industry could have a half dozen “approved” website builders all working to the same standards. These independents, ad agencies, etc. would have competitive prices because they’d all be working to the same general standards that fit into the overall system.
The firearms industry would have a central electronic distributor with 900,000 SKUs. Everything that’s on the floor of the SHOT Show, and more, would be up on line. Each manufacturer, with a standardized Internet sit would maintain their sit, with links to them from the central distributor. It would be a 24/7 SHOT Show, 365 days a year, selling to the whole world.
Each manufacturer would control his website feeding into the master system. Manufacturers could up date their “catalogs” at any time. They could introduce new products at any time. Logically, new products in the gun/hunting industry should be introduced in August/September, not February. New product introduction in February, for our industry, is out of the dark ages. It gives all of your competition a good half-year to copy your product before the next big sales season, September through January.
The central distributor would be a warehouse free, electronic distributor. It could be anywhere. It could officially be headquartered in one of the 4 USA States that have no corporate or personal income tax, like Wyoming. Or better yet, it could be off shore in Bermuda, the Cayman Islands, etc. In Bermuda or the Caymans it could also become a Bank, and hold money for its suppliers, make loans, and what will become very important in the future, hold funds in something other than US dollars. It could become a share corporation, with the manufacturers owning the company like SAIL. SAIL, set up over ten years ago in Bermuda by my good friend, Bob Chiarello, is owned by American gun manufacturers and is very successful.
I’ll be leaving for the SHOT Show in a few weeks. Las Vegas is interesting, but basically I don’t like it. To me Las Vegas is like the Democratic Party. Promise everything while taking everyone’s money. I’m mathematically literate so I don’t gamble in casinos, and I’m politically literate and I don’t vote for Democrats.
The SHOT Show is also obsolete. As big and lively as it seems today, it will be gone in 15 years. The SHOT Show has the same basic problem as most of the gun industry’s distribution; massive costs and highly dubious benefits. The SHOT Show, in my opinion, is already 50% worthless status symbol. On a cost-benefits analysis, there are much better ways to do a lot more, for a lot less cost.
Here’s the real world truth. 99.999% of the end-user consumers who buy your product don’t know the size of your SHOT Show booth, don’t know if you’re there or not, and could care less. The SHOT Show is a slice of Las Vegas, a glittering showboat, a light & sound mind numbing magic act that cost a fortune for what could be done in better ways for less money.
When I came into this industry in 1968 everyone went to “The great NSGA Show.” My thinking is always out in front of things. I strongly supported breaking away from the NSGA and starting SHOT because that was the right thing to do in 1977-78. As usual, I’m still out in front of things. I stopped having a booth at the SHOT Show six years ago. It is such a pleasure not having a booth, and we saved a ton of money. There are only about 6000 FFL holders that go to SHOT, but AFI circulates through the total 58,000 FFL list. One day I got smart and asked myself, “Why do I have to spend a fortune to have a booth at SHOT when we go to everyone with an FFL at SHOT, plus tens of thousands more FFL holders that aren’t there?”
Many people avoid asking the right questions. For example, ask yourself, if the SHOT Show is so good for finding dealers, why do 2/3rds of the distributors NOT have booths? Why does the most informed “trade magazine” in the industry, American Firearms Industry, not have a booth?
Oh, the “great NSGA Show,” the Show where everyone “had” to have a booth. The great NSGA Show is history, totally gone, just like the SHOT Show will be history in 15 years, or less. The total convention idea as we know it has peaked, and is declining. It will decline slowly at first, but “conventions” are basically the way things were done a 1000 years ago. Modern air travel made conventions national, and the cost of future air travel and transportation will make them cost/benefits obsolete.
Transportation costs are going to continue to increase. Oil will permanently be above $100 a barrel in four or five years. Chinese and Indian oil demand is increasing by leaps and bounds, and world oil production is peaking right now. Few people know that OPEC oil quotas per country are based on stated reserves, and the reserves have been falsely over stated to get bigger quotas. The world has smaller oil reserves than current figures indicate, and it has increasing demand. This means relentless long term pressure for higher oil prices.
The airlines still have low fairs because a third of them are in bankruptcy and are not servicing their long-term debts. Transportation costs will continue to climb. The US dollar will significantly decline relative to gold and oil. Systems based on moving thousands of tons of product form warehouse, to warehouse, to warehouse, and moving thousands of people from one end of the country to another, (ie. SHOT Show) all of that is on the way out.
The American dollar, long term, will continue to decline relative to oil and gold. Gold is an indicator of the dollar’s real value, and it’s well over $500 an ounce, and that is a real bad sign. Alan Greenspan retired this month. I think he decided to leave while the leaving was good. Everything based on systems of needlessly shipping products and people around is on the way out.
Recessions have not gone away. There are recessions in our future. Massive debt of every kind, and at every level in America has become a mania. The next recession could be a good one. 40% of all new jobs in America are directly or indirectly connected to the real estate/building bubble. So what happens when the bubble breaks? Our next-door neighbor died of old age, and a contractor bought the house, tore it down, and built two new houses. The lots are 50 feet wide by 150 deep. The houses are nothing special. No theater room, so safe room, no generator, tiny and ugly back yards, truly mediocre landscaping, cheap wooden fence, one car garage, just a house, house. The cost? 1.9 million dollars each! The yearly real estate taxes will be about $40,000, and yearly hurricane insurance will be about $20,000. And they both sold before they were completed! It can’t go on like this forever otherwise people will be paying a million dollars for a garage.
Those companies who meet the challenges now, who change now, most of those will survive. Those companies who are waiting for yesterday o return, after the next recession many of them will be gone.
As I said in other articles, the industrialized world will have massive changes. The world is increasingly becoming more messy, complex, interconnected and volatile. The general level of confusion and fear will increase. There will be new channels of distribution in most industries. Those who figure out what new ways will be the most effective will be the winners.
Only members and subscribers receive AFI every month. AFI rotates thought the total FFL list. If you want to see each monthly issue, and you should because AFI has the best information in the industry, join today. Fill out the membership card on the dust cover and mail it back, or call in your membership, 954-467-9994.
Overall, I’m very optimistic about the future of the world. However, America absolutely must let go of the dead past at every level and move onwards. The key word is “courage,” the courage to let go, and the courage to step forward. Modern American patriotism is meeting the challenges that face us with creative, imaginative and bold new solutions. The new world that’s coming isn’t a treat. It’s an opportunity almost beyond our dreams.
Andrew Molchan
The Professional Gun Retailers Association.
The National Association of Federally Licensed Firearms Dealers.
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