By Charlie Lunan
Following eight years of explosive growth that saw the number of federally licensed manufacturers more than triple, the firearms industry poised for consolidation.
Sales data from SSI Data show year-over-year sales of firearms declined in the high single digits in December, compared with a 16.4-percent decline in federal background checks made through the NICS system run by the FBI. Sales of centerfire, semi-automatic rifles, including modern sporting rifles, or MSRs, fell 21.6 percent. The declines marked a sharp reversal in such sales, which had been doubling and tripling in the eight weeks leading into the election thanks in part to California’s new ban on MSR sales, which took effect January 1.
December marked the first time SSI Data has reported a year-over-year decline in monthly sales in two years and the first time the FBI has reported such a decline in NICS checks in two years.
“There were a lot of background checks for Black Friday, but from what we can see sales were not nearly as robust in the wake of the election,” said SSI Data Client Solutions Specialist Odie Tucker. “There was this huge demand fueled over the last eight years due to uncertainty over gun rights, but there is actually a large amount of uncertainty now about demand.”
A Rash Of Discounting
The sharp deceleration resulted in a spike in discounting last month as big-box retailers and other dealers who loaded up on MSRs and other firearms in anticipation of a Clinton victory shifted to clearance mode.
“We saw some of the big boxes do some pretty strong discounting after the election, particularly after Thanksgiving,” said Larry Hyatt of Hyatt Guns in Charlotte, NC. “Unless their buying is a lot different than ours, they are selling at cost.”
Hyatt Guns stocked up on MSRs and ammunition going into the election but “did not go hog wild,” figuring that even if the Democrats took the White House and Senate they would need at least 18 months to get new gun legislation before Congress. By the third week of December, however, Hyatt’s buying Sports Inc. was advising its members to enter “inventory reduction mode.”
“We think demand for MSRs will diminish,” said Hyatt. “The fear of a gun law passing because of an event is going to diminish some. We want to have less inventory because we think cash will be more important next year.”
A quick check in early January showed Cabela’s, Gander Mountain and Sportsman’s Guide offering discounts in the 10 to 15 percent range on a selection of entry level MSRs from such brands as American Tactical Imports, Smith & Wesson, Anderson, Ruger, Troy and Mossberg.
The Obama Boom
There is no denying that the firearms industry flourished during the Obama Administration. In the seven fiscal years ended September 30, 2015, the annual average growth rate (AAGR) of firearms production accelerated to 14 percent from the 5 percent seen during the preceding seven fiscal years, ATF data show.
The era was marked by volatility, which most analysts attribute to a perception that the risk of tighter gun control was significantly higher under the Obama Administration. This made consumers highly sensitive to any news that might lead to restriction of MSR sales.
In December 2015, for instance, NICS background checks surged by 1 million, or 43.5 percent, from a year earlier in the wake of a mass shooting in San Bernardino, CA. SSI Data figures show total gun sales grew by nearly a third that month, while sales of MSRs more than tripled. The week after a gunman killed 49 people at a gay nightclub in Orlando last June, MSR sales surged tenfold and NICS checks swelled by 600,000, or 40 percent. By year end, MSR sales were up high double digits for the second consecutive year, according to SSI Data.
“What you are dealing with is an extremely responsive market,” said Tucker of SSI Data. “Almost crazy responsive, because it swings both ways.”
All of the top 10 days for NCIS checks have occurred since 2012 and seven of those occurred between Thanksgiving and Christmas, according to FBI data. Even after the Republicans gained control of the Senate in the 2014 mid-term elections, dealers could count on spikes in traffic and sales following news of gun violence or new laws restricting gun sales and ownership.
The MSR Assemblers
Toward the end of Obama’s seventh year in office, the number of federally licensed firearms manufacturers had reached nearly 10,500, up from just 3,000 when he took office.
Some of that growth came from a cottage industry that sprang up to meet demand for entry-level MSRs, which are sold for $600 to $700 at retail. Entrepreneurs who could obtain licenses were able to launch their own brands simply by assembling receivers, barrels, rails, stocks and other components purchased on the open market.
While MSR sales have certainly been driven by consumers’ fear of terrorism and gun control, the rifles continue to gain popularity among target shooters and younger hunters, as evidenced by the growing array of such rifles being offered with Kryptec camouflage designs.
“It’s the most accessorizable firearm platform out there,” said Thomas Carlson, director of marketing communications for Daniels Defense, which is working through a three-month backlog of orders for its high-end MSRs. “You can buy a DD MSR and put any rail or barrel you’d like on it. That’s really why it’s so popular and why the accessories markets is so hot.”
The Big Boys Move In
The problem for the MSR assemblers is that demand now appears to be dropping even as competition from major gun manufacturers is rising, said SSI Data’s Tucker.
“There are a good deal of manufacturers who owe their existence entirely to the boom,” he said. “Many have never operated in a declining market.”
Savage Arms, a hunting rifle brand owned by Vista Outdoor Inc., launched its first line of MSRs at SHOT Show. The line includes four rifles ranging in price from $850 to $2,300.
“The CapEx and R&D to be able to develop a full line of modern sporting rifles is de minimis,” Vista Outdoor CEO Mark DeYoung told analysts in November. “It is an easy way for us to support our customers that are looking for those kinds of long gun solutions and do it in a very low investment approach.”
Remington Outdoor Co. said it increased production of lower-priced MSRs, including a new entry-level rifle from Bushmaster, in the third quarter to respond to demand for lower-priced rifles. Last May, the company announced it would close a factory in Kentucky and move its product equipment to a plant in Alabama to drive down costs.
In early November, Sturm Ruger & Company Inc. reported unit sell-through of its products by distributors grew faster than NICS check, indicating it gained market share for the second consecutive quarter.
Daniels Defense, which dwells at the high end of the market, is moving forward with plans to double production of MSRs, rail systems and accessories from 2015 levels at its plant in Georgia.
Excluding pawnbrokers or collectors, the country added nearly 8,000 federally licensed firearms dealers from 2009 to 2015, or nearly 70 percent of the number lost during the preceding seven years.
Hyatt Guns President Larry Hyatt estimates that eight new indoor handgun ranges with showrooms and seven big-box stores opened in the span of a few years in the Charlotte-Gastonia-Concord metropolitan statistical area where his store competes. Dick’s Sporting Goods, Cabela’s, Bass Pro Shops, Academy and Gander Mountain all operate in the region, which is home to about 2.5 million people.
“We now have 16 big-box competitors with showrooms,” said Hyatt, a second-generation owner-operator who plans to hand off the business to his son Mitch this year. “So we had a lot of growth in gun sales, but a lot of huge retailers opened, so there was not a great benefit to individual retailers.”
The Hyatts expect gun sales to still be good this year, but not as brisk as they were in 2015 and 2016. If demand falls more than 10 percent, though, things could get ugly fast. “My feeling is that with the internet and the over-expansion of retail, we are in store for a rough ride, particularly on margins,” he said.
Based on conversations with colleagues across the industry, Carlson foresees a broad slowdown in MSR sales in July and August.
“I think a lot of small assemblers will go away and we will see larger companies compete for shelf space,” he said. “It’s going to come down to how aggressive the larger companies get spending on marketing and public relations.”
Carlson said a purge might be healthy given the poor customer service offered by many startups. Still, he was among many expecting a very upbeat vibe at SHOT Show. “I think everyone in our industry is breathing a sigh of relief because as much as I disagree with [Trump] on many things, he is not coming after our jobs and livelihood.”
Photo courtesy Remington Arms