Ammunition is very much a commodity. It is in a constant state of price fluctuations requiring a great deal of attention and smart buying from raw materials and components along with a lot of luck on market timing and demand fluctuations. I would say I am approached, and/or companies I work with are approached weekly to monthly with someone wanting to get into the ammunition market. It makes perfect sense why this would jump to the forefront of people’s minds. If they are remotely connected to the shooting sports, whether 100% recreationally, as a competitor, hunter, or even a law enforcement or military member, it is easy to see why it is attractive. First, it is fun, and beyond that it is a product that is consumed and there always needs to be more of. As the largest shooting and firearm ownership market in the world, and with billions of rounds being sold per year, it is easy to understand why this industry continues to draw in entrepreneurs all the time. I will speak to all of the pros and cons of starting an ammo company at a later time, but today I will focus on production strategies as they connect to an ever-moving market and a sales effort.
Let’s start by defining the ideal state of the ammunition manufacturing to market environment. Ideally, a manufacturer would be able to procure all necessary raw materials and components at the best possible price at exactly the time they need them to keep up with roughly 80% of the total demand, build the ammunition that has just recently been purchased by a client in the exact quantity and packaging configuration they need, to be shipped out the door and show up on the shelf just as the end consumer needs to walk in and buy a box. In addition, there would be perfect profitability at each level of that process for each stakeholder in the chain. In other words, a perfectly timed pull through system that allows for some demand to stay intact to keep the pricing and profitability in check.
Anyone who has spent a day in the manufacturing environment at any level knows the above is not achievable, however we strive to reach that mark by looking at the myriad of market influencers, barter on component and raw materials prices and delivery, and hope we can get a little luck along the way as the market ebbs and flows. If you have never read The Goal by Eli Goldratt, this would be the time to have your mind blown and do so immediately. Trust me. It is a book you need in your office and in your very being at all times. Insert Herbie below…. Read the book. You will get it.
Scenario 1: Production Cost is Above Current Market Price
An ammo manufacturer is always purchasing materials and components to manufacture or assemble loaded ammunition. The ideal state noted above, although impossible to attain, is still our ultimate goal and all the while hoping the product is pulling through to the market to keep cash flowing and steady. Everyone who manufactures ammunition wants every round going out the door to be at a profit. I know, that is a crazy thing to want right? It is important though as we walk through this scenario to consider this basic want, however is it a need? More importantly, what do we do when we are in this situation of manufacturing a product that is all of the sudden coming off the line at an all-in cost above market price?
The manufacturers of ammunition are faced with this scenario most, if not every year. When they find themselves in this situation, most manufacturers see two choices – 1. Stow that over priced ammo in the corner and wait for the market to come back up, or 2. Push it out to the market, take the hit, and hope everything balances out in the wash. This seems like a black and white situation with a market that is moving up and down all the time. Manufacturers work hard to capture market intel daily, get a feel and trend of pricing, and work to make a product that comes of the line in the black. There are many times when this just isn’t possible, so back to the two options. Which one is the right option? Although there could always be an argument to hold overpriced ammo for a short period of time, the reality is for every day you hold that overpriced ammo, the actual cost of that ammunition is increasing. How is that possible? In many cases when the warehouse starts to fill up with product and tying up cash, production will slow down because they are running out of resources to keep loading materials flowing. When production slows down, unless the manufacturer quickly lays off all the people they don’t need as production slows, as many will do to some extent, the overhead starts to increase per round produced and cash flow is also waning. This increase has to be absorbed somewhere, and ultimately it will either be applied to ammunition already in inventory or ammo that is yet to be produced. This is incredibly difficult to track and is the silent killer in the commodity manufacturing space. This leads to only one viable conclusion: It is a much better approach, and I would contend the only real way to stay in the fight of the market, to price product coming off the line to market and move it and keep the line running, cash flow turning, and track the patterns and costs. If it is determined one product is always running off at a negative, then there has to be one running at a positive to offset, or stop buying into running the negative product in favor of a more positive one. Things must be moving in order to truly track and see this so it can be attacked and driven into the positive.
I know one of the largest manufacturers of ammunition in the US market has a multitude of 9mm offerings in all sorts of flavors from entry level low cost target to absolute premium duty and self defense product. They produce millions of rounds per year of each flavor. Their premium products go out the door averaging around 58% gross margin, yet as an entirety their 9mm production as a whole averages 6-8% annually in gross margin. How can there be some product coming off the line at nearly 60% margin, yet average in the single digits across the whole caliber? The answer always shocks most people. There is a vast volume of product in the 9mm category that will come off the line and enter the market at a loss, every single day, a.k.a “a loss leader.” This usually generates a couple questions from the person learning this. 1. Why do they produce 9mm that loses money, and 2. How do they make money? 9mm is the largest volume handgun caliber in the world, and as such, it has to be produced. Manufacturers treat this as a pull through caliber they have to offer in order to get customers to buy their other products for the shelf. There are years when the number is actually negative over all skus of 9mm, and to question number 2, if they are not making other products which provide a larger margin then they aren’t making money. The best most manufacturers hope for 9mm is that it covers the “shop factor” or “overhead” of the factory. We used to refer to it as the “keep the lights on caliber.”
Summary of Scenario 1: To stay in the fight as a manufacturer, the line needs to keep running, intel from the market needs to be solid, correct, and often, and other products must offset when this situation occurs.
Scenario 2: OEM Manufacturer Cannot Procure Components at a Price that Allows for Profit to The Market Regardless of Caliber.
Let’s start with a definition for those who many not know. OEM – Original Equipment Manufacturer, in this case refers to a manufacturer who is utilizing finished components (brass, primer, powder, and projectile) from another manufacturer and assembling some or all of them together. Most manufacturers in the world fall into this category at some level, or in other words, very few manufacture all four components. This lack of vertical integration causes a massive challenge because anytime a manufacturer relies on another company to supply them with a product, and in this case, those companies are also competitors, there is great risk. I wont get into the intricacies of that concept in this blog. If you can picture two separate markets running at the same time within ammunition, the first being loaded boxed and finished ammunition running off the end of the manufacturing line, and the second being the manufacturing of bullets, brass, powder, and primers from various locations. Both markets are viable within both the manufacturing channel and the commercial channel. In other words, manufacturers buy components and dealers also buy components to service the consumers out there who reload at home. The manufacturers who depend on someone else to build their components are also customers at the same time. Now, as you can imagine, price fluctuates in both the loaded ammo market and the component market one tends to lag the other, both on the upswing and on the downswing.
When loaded ammunition takes a price spike, it does so based on demand, and happenings in the world (i.e. wars, threat of legislation, season, etc.), and the components that are out there sitting on shelves and warehouses don’t spike at the same time. Likewise, if copper prices and lead prices go up and down, there isn’t an immediate impact because the product built at a specific price has to be pulled through to get to that lower cost or higher cost metal. When loaded ammunition drops in price due to a demand reduction, then component prices both to the manufacturers and the dealers will also reduce but at a much slower rate. When this occurs on the downswing of loaded ammunition prices, the majority of the small manufacturers who buy components to load all of the sudden find themselves in this scenario: “I can’t purchase components and stick them together into loaded goods and sell them for a profit.” Often at the front end of that downturn of market price, this may be the case for nearly every single product. What then is a manufacturer supposed to do? This depends almost more on what the manufacturer CAN do. Do they have a stockpile of funds to carry them through the market downturn? If so, then I would argue back to point one, that you have to keep producing and keep your brand flowing off the line and into the market in order to keep a client base. If not, you might be out of luck. This is why it is so important to make and save $$ when the market is handing out profit to have in hand when the market turns and runs into the ground.
There is another industry out there which knows this scenario painfully well – Farmers. Farmers traditionally had to leverage the windfall years to make it through the lean ones. It was a juggle and with even more luck required as they get to hope for the best of timing and delivery out of mother nature as well. The big difference today is there are Govt subsidies for farmers of a certain size to allow for making it through the lean times. Ammunition companies don’t have that option. To add insult to injury, they are also on the hook for 11% Federal Excise Tax on anything they produce and sell. What you begin to see in the small loader market in the lean times is creativity or death. Creativity in diversity, launching something new, bringing new ingenuity, buying a company, vertically integration, or anything that will assist in reducing the pain of losing cash flow and going out of business. Many small businesses simply don’t have an option and thus close shop.
Summary of Scenario 2: Like Scenario 1, a manufacturer must crank the product off the line and out the door in order to be in the fight and give themselves a chance to survive. Stopping and waiting almost certainly guarantees a slow painful death of the company.
Below, I will share a couple scenarios in hopes of highlighting the above market situations. Joe Bob is an ammunition manufacturer. He is reliant on other manufacturers for all four key components in building ammo. Joe Bob builds 5-10 calibers on a regular basis. Like most loaders, Joe Bob sells more 9mm than anything else so it runs pretty much all the time off the line. In a market downswing, Joe Bob all of the sudden finds out he is unable to move the 9mm at a profit and starts to see pallets of finished product stack up in the warehouse. The ammunition has a real cost fluctuation from one LOT to the next because component prices are fluctuating, so let’s say there is a pallet of 50k rounds that has a real cost of $0.25/rd and a second pallet of 50k rounds that has a real cost of $0.23/rd. The loaded ammo market has been declining, and as such the market cost is currently below the real manufactured costs above. Now a regular customer calls up and notes he would like to purchase 100k rounds of 9mm but at the current going market rate of $0.22/rd. Do you take the order and subsequently the loss?
The answer, of course, relies on a multitude of variables. For example, there may be an ongoing contract where the ammo can go at a higher than market price, or the market might be trending up and it makes sense to give it a couple weeks before parting with the ammo for a loss. In most cases however, the answer is to take that order, keep that cash flow turning, and work like crazy in the supply chain to get costs down wherever possible to stay in the price window for the market. We noted before that Joe Bob also makes 5-10 calibers regularly, so it is also a great idea to work with that customer to, if possible, mix the order with some other items that aren’t in the same situation of being upside down to the market. One thing to note here is that market is market. Small loaders have no choice but to price to market and work through these situations by keeping product flowing and cash turning. Remember as noted prior, the longer ammo sits, the more cost it acquires. Ultimately Joe Bob needs his supply chain team to work some magic and negotiate lower costs of components, while at the same time using market intel to determine what else can be loaded to offset the losses of certain products. Finally, a sales team who is dynamically working to maximize opportunity within the different channels is key.
The Importance of Solid Market Intelligence
Considering the previous situation with the $0.22/rd offer, something to consider is whether that price is the actual market price. Anyone in this industry knows there is some aspect of negotiations and dickering at nearly every level when taking sales to dealers. I run a sales team as I have for many years, and I push my team very hard on the aspect of solid intel, relationship building, and triangulation of real information to wade through the b.s. There are many things to consider when seeking intel around the country in a constantly moving market. As pricing ebbs and flows with demand, there are also many other items to consider such as season, weather, regional happenings, and industry/import shift in large volume insertions. All of these items impact pricing on the day to day. So how the heck do we know where the market actually is? Often it isn’t a set number, but a range by product type of a few cents depending on the above factors. It takes some experience, and solid relationship building to reach a viable market intel level of confidence and to generate trusted resources for info.
As we bring new sales people onto the team, I always cover the importance of true relationship building, never making claims that are not validated, and getting to the point where we share intel with our dealers where it is applicable and appropriate in order to help them be successful as a client and build trust. Trust turns into good intel, such as what they are seeing pricing at, or what may be happening in their region of the country that may not match with others. It is our job on the sales side to have an understanding about all of the items in this blog, and ensure when we bring an intel point to the table that drives a decision that we are right! In the $0.22/rd scenario above, if it was actually possible to get $0.23/rd out of that order, our salesperson has now cost the company real $$. It is a common statement I have heard over the years that sales people aren’t interested in profit for their company, they are only interested in selling stuff and getting their commission. I have seen situations where this is very much the case, but in every single one of those situations, the sales team has limited to no understanding of the bigger picture of the company on the production side. Like most things, education in the big picture in the other parts of the business is crucial to building a well rounded sales person. Similarly, production should also be educated on market trends, how clients buy, and what drives price and demand so they can have a better understanding of sales and the market shift challenges that occur. This takes solid communication within the whole of the company.
In another scenario, Big Tom is an importer of ammunition working in partnership with a manufacturer in another country to produce and box goods under his brand and import them ready to sell. Ammunition ships over in a container via ocean freight normally due to weight, and this takes time. This time can be good or bad as the market is constantly moving as we have outlined before. This can quickly become a nightmare if the market is at a certain point, ammunition is ordered, and then the market drops while waiting for the product to arrive. Let’s say Big Tom is ordering in a container load of mixed products across different loaded ammunition products to maximize the spread of profitability potential for the container load. This would be smart for a couple reasons.
First, there are often products in high demand, then when imported simply cannot be profitable although you know for sure you can sell them if you could only get to market price. Second, there are other items which may not be in as high demand or seasonal, but are more profitable because they fit into a specialty category of niche (i.e. self-defense ammo, or hunting loads). If you mix the container well, often you can afford to put the product out where some of the times are at a loss and some are at a profit which offsets the losses and still makes the program profitable overall. Still, with the time delay, sometimes this isn’t how things go because in order to realize that profit, the product has to actually sell at the targeted prices the container was built around. Let’s say Big Tom lost his pants on his first container because he banked on something selling for a certain price only to have the market shift and his big margin offset product dropped in demand and value and now the whole container is in the red. Now what? Again, there are two options – 1. Throw in the towel, or 2. If possible, keep on fighting by placing that next order and learning from market trends and making an adjustment. Maybe the mix can be presold to a key client. Maybe the mix can be adjusted. The answers aren’t always clear or easy, but for sure, scrapping the whole thing means Big Tom is going to need to offset the loss somewhere.
I have observed something in common in many small loaders around the country. Most loaders who have been around a long time and continue to find a way through massive market downturns to see another day, have another profit center in the mix. Many of those are not even related to the ammunition industry at all. Others have enough diversity in their offering and enough buying power they can stay close enough to the front of the line to continue getting loading materials at a viable price. Some diversify within the industry into other items like firearms, optics, or accessories hoping to have something to make money when ammo is struggling. Some work on a spread of channel focus such as a percentage of contract business, distributor business, dealer business, range business, and export business. Still more work toward some volume of vertical integration by adding a bullet press or a brass line to reduce their costs and dependance on suppliers. The key to the above commonality is to be a manufacturer of one or two things, totally reliant on all key components is incredibly risky and likely to fail. Even some of the most successful mid-tier loaders in this industry haven’t ultimately survived some of the sharp downturns in the market, and as we know even some of the biggest names have disappeared or been consumed by competitors.
As I write this, the ammunition market has been in a downward pattern for the last 18 months in most of the common calibers, while component prices stay incredibly high and difficult to source, and powder and primers remain incredibly high priced and difficult to find. This is one of the most challenging times to be an ammunition manufacturer and somehow make a buck. It is early March, the spring weather is about to hit across the country and shooters will go outside and start shooting ammunition which will generate the “spring spike”. Manufacturers have an approximate 8-week window to capitalize on all they possibly can before the “summer slowdown”. Those who have been backed into a corner and cannot leverage the spring spike, may find themselves in a different profession by the end of the year. The best path forward is through, with grit and fight and passion to get up every single day and treat it as a battle to get to the next and the next and the next. This is when playing “prevent defense” is likely to be a nail in the coffin. It is the best time to fight for market share and be aggressive at every turn. Build relationships, and surround yourself with good people. Throw up a whiteboard and a war room and draw up the best plays you can, possibly even with a trick play or two to give yourself the best possible chance of winning this game of business.
I tell people often the ammunition market since 2008, when I entered has sucked the soul out of me. It has been such a roller coaster of feast or famine and immense challenges and I have spent time in all aspects of the process from supply chain, to manufacturer, to sales, etc. If you think this industry isn’t a knock down drag out fight of will mixed with some luck along the way, I would love to learn from you!
As with every post I do, this is based on my experience with the situation as well as my opinions based on that experience. I don’t claim to be all knowing in any category, but feel there is value for others in sharing my understanding and opinions on any matter as I have been doing this a long time at this point through some of the craziest market times ammunition has ever seen. My mind keeps telling me I am the young bright eyed kid coming out of the service, but all of the sudden I find myself getting phone calls from people asking what I think. It has taken me some time to accept I am entering that whole phase of “experience” where enough years and situations have occurred that I can speak to at least some perspective of most situations. I hope this post provides something positive. I always welcome feedback or other perspectives as that is what makes us better. Regardless of the competition of the industry, I still believe it is stronger to work together with many of those folks than it is to turn it off and only drink your own Kool-Aid all the time.
Best of luck in the fight!