Gun Manufacturers Face Trouble With Demand
A decade ago, Cerberus Capital Management LP purchased Remington Firearms, a company it hoped would show huge returns for its initial investment.Recently, the company has come onto the brink of bankruptcy. Remington has been a defense contractor for the United States since 1816, producing many of the weapons that our police and military use today. However recently it has shown signs of struggle. Historically firearms businesses never survived past the ending of a conflict as the demand for weapons would dry up during peacetime, however in modern day American society civilian demand drives the multi-billion dollar industry we know today.
The success of many weapons manufacturers rises and falls with the party of the presidency that sits in the White House. Throughout all of Obama’s presidency, gun purchases across the United States reached all time highs. Gun makers such as Remington were able to turn large profits by capitalizing on people’s fears that these guns could be taken away by the government. Since 2008 gun sales for Remington domestically have almost doubled from 300,000 to over 600,000 rifles annually. With Democrat Hillary Clinton expected to win the 2016 presidential election, many gun makers including Remington made capital investments going into the term forecasting demand to stay constant if not increase. This capital investment expected there to be large increases in the sales of guns and ammunition to private civilian owners.
At the end of 2016, Republican Donald Trump won the electoral vote which resulted in massive plummet in demand and created a result that surprised many as Hillary was heavily favored by many to win the election. Remington, along with many other major manufacturers have since seen large declines in sales of many of their products and in the wake of the Parkland Shootings in Florida, many are beginning to file bankruptcy. This crash in demand has led to huge losses and inability to pay back some of their debts from the large capital investments into manufacturing facilities.
Remington’s management, along with its parent company Cerberus is now at a crossroads. Management must decide whether demand will go up, down, or stay the same. While this is true in most industries, in the defense industry this demand forecasting is to the extreme, as changes in political climates could quickly make many of their products illegal, or unavailable to the general public overnight. Remington must keep an eye to the future as if demand does skyrocket with an impending gun ban, they may want to be in a position to take advantage of this large market. This forecasting of demand is perhaps one of the most important things the company can do as its survival depends upon it going forward.
Politics aside, as it is a heavily contested issue currently, what action do you think Remington’s management should take looking toward the future? Should the company be liquidating its assets and downsizing severely due to lack of demand? Should they remain the same? Should they scale up their production to meet future demands?
https://www.wsj.com/articles/massive-debt-roller-coaster-sales-drive-private-equity-backed-gun-maker-into-bankruptcy-1520946453?mod=searchresults&page=1&pos=3
https://www.washingtonpost.com/news/business/wp/2018/02/23/u-s-gun-manufactures-have-produced-150-million-guns-since-1986/?utm_term=.3296a460468e
You bring up a great point. I never realized how volatile the demand in the firearms/ defense industry is. Forecasting in a stable industry already seems to be a difficult task, so I can only imagine forecasting in an industry in which political changes can positively or negative impact demand in a split second. I believe that as of right now, Remington should stay the same or decrease their supply slightly. This decrease in supply can be attributed to the recent events with the school shootings in the United States and the resulting controversy over gun control. Remington should not do anything major in regards to their demand until there is a policy change. Significant policy changes should be the reason that Remington radically increases or decreases their supply.
This was a great topic of discussion especially considering all of the gun related events that have been occurring in the past few months. At this time I think that we are seeing the greatest push for gun control and ban on firearms yet I don’t see this being carried out by our current President in the near future. I agree with Lauren that companies should decrease their supply in the short term because no one is really worried about not being able to purchase guns right now. Unlike when Obama was president and Hillary was a hopeful, people were scared that they were running out of time. While reading about the decline in sales of handguns I noticed that other types of guns were not showing the same trends. Instead of simply decreasing supply, Gun companies are instead rebranding and expanding their inventory in order to cater to a larger market. Having a wider variety of firearms and equipment, specifically sporting items for hunting and other outdoor activities, is preventing these companies from going bankrupt. Being from North Carolina I know there is and will continue to be a constant demand for hunting rifle, knives, etc because these items don’t have the same negative connotation that handguns and machine guns currently do.
https://www.cnbc.com/2017/03/02/demand-slows-for-firearms-sending-shares-of-major-gunmaker-down-5-percent.html
I found this post incredibly relevant and eye opening. Previously, I have never really thought about how volatile the weapon industry must be. With the current political and social landscape, weapon manufacturers must be updating inventory status and adapting to current events on a daily basis. Recent devastating events clearly will shape future legislation that will in turn further the forecasting burden on weapon manufacturing companies. After the Florida atrocity, Walmart and Dick’s both immediately transformed their gun distribution policy and limited purchasing for fire arms for 21 year olds and up. This most likely affected gun manufacturers’ inventory processes. These two retailers probably decreased their order quantity for fire arms as their ability to sell fire arms was restricted to a more defined age group. As a result, there is less of a demand for fire arms from weapon manufacturers, so these manufactures must adjust their forecasting and inventories. As horrific similar events unfortunately are likely to continue, gun manufacturers and even other retails must appropriately make inventory forecasting decisions to maintain solid returns.
https://www.nytimes.com/2018/02/28/business/walmart-and-dicks-major-gun-retailers-will-tighten-rules-on-guns-they-sell.html
I always figured that the weapons industry was somewhat volatile depending on the current environment, but I never would have guessed that it was so highly reactive to the presidency and prospective president’s policies. Coming from the south, I have definitely witnessed the panic consumers have when they believe gun rights may be taken away. Due to recent events the future of the gun industry is up in the air, but I believe that there is still potential for weapons companies to turn a profit. These companies should turn their efforts to the mass sale of a technology called smart guns. The gun is equipped with technology that can identify the owner of the gun, the gun will not fire if someone other than the owner is holding it. This technology has been around for a while, but the NRA has blocked its use. This technology would not prevent horrific events such as the Parkland shooting, but it would prevent some of the main contributors to the U.S’s high firearm death rates: suicides, accidental shootings by young children and crimes involving a firearm that was stolen or acquired illegally. This is not a complete fix to the problem; but it could make consumers feel that they are making a safer purchase than the normal gun, which could increase demand and save the weapons companies. A poll that was conducted in 2015 found that 40 percent of gun owners would trade their gun for a smart gun; younger gun owners were far more likely to be willing to make this trade. The mass production of this technology would not require a new law, it only needs a market with ample supply and demand.
For more info on smart gun technology:
https://www.bloomberg.com/view/articles/2018-02-16/smart-guns-gun-control-that-s-good-for-the-gun-business
http://www.alleywatch.com/2018/03/can-technology-help-stop-gun-violence/
This is such a great topic to talk about that I never even thought of when thinking about forecasting. What shocked me most from this post is that effect that the current president had on gun sales. I would think that demand would increase with a Republican president as they were less likely to try and enact restrictive gun laws. Additionally, I think that this example demonstrates a key problem with the way that major gun companies forecast their sales. It is extremely risky to base any sort of forecasting on a presidential election or any election for that matter. Regardless of what the polling data and predictions might be, you can’t accurately predict an election 100% of the time. By taking such a big risk, these companies could have gained an enormous reward in terms of profit, however the alternative, that they are facing now, is bankruptcy. As we saw from our latest homework, the best way to forecast is through exponential smoothing. These gun manufacturers should’ve stuck to the data and not risked their businesses on the outcome of an election.
I wouldn’t have expected this topic to spill over into politics, but the forecast for gun manufacturers depending on a presidency makes total sense. I wonder if there’s a way to see if gun sales have suffered because they can’t meet demand, or if they’ve spiked and been able to keep up?
I found the article linked below that explains how the increases/decreases worked – apparently the apparent “decrease” after the election was really due to an unusual spike in gun purchases leading up to the election. I think the role of politics also shows that there isn’t one perfect way to forecast an outcome and using only business or only politics to attempt to forecast an outcome can leave the observer shortsighted.
http://fortune.com/2017/08/04/trump-gun-sales-obama/
I find this idea of the gun demand being linked to presidency very interesting. Especially the notion that a pro-gun president can lower the demand of guns. I think a possibility for Remington could be to wait the situation out if it has the funds to operate for the next few months on a loss. Speaking from a strictly business point of view, the demand for guns could drastically reduce after incidents like the Florida shooting but could rise back up within a few weeks. Therefore, management could use historical data to forecast the future. I would definitely not recommend expanding their production process when they are experiencing problems with generating demand as of now.
Gun manufacturers have to be uniquely in-tune with the political and news environment in order to accurately forecast demand. Large capital investment into factories might not be the best strategic move for manufacturers like Remington as the volatility of demand is too high in the current climate. Many investors in gun manufacturers are severing ties to the industry fearing a generational change in the social views on gun control. This makes room for scavengers to replace their share in the nearly $11 billion industry that see the current climate as media noise and cultural angst towards the mass shootings. Many gun manufacturers including Vista Outdoor inc., are spent more than $1 billion in recent years to scoop up consumers brands like Camelbak water bottles and Giro bike helmets to diversify its business. The strategy backfired when REI and other large customers announced they would stop ordering product from Vista. This makes it difficult not only to forecast demand for guns but of other products lines as well. https://www.wsj.com/articles/firms-reassess-involvement-in-gun-industry-in-wake-of-florida-shooting-1519606834
Very interesting topic. I think the gun industry does vary a lot, especially in the United States, where we haven’t had a war on our soil in decades. Also, I did not know that gun sales varied with the presidential candidate in or running for office. The increase in the school shootings is greatly affecting the gun industry, but I do not think it will be enough that the demand will decrease significantly. It is sad to say, but tragedies like the Parkland shooting only stay in the media for a couple months. After the news outlets stop talking about issues, most of the American population also stop talking about it. Nonetheless, I still think it is hard to gun manufacturers to forecast what their demand will be. I think they should try to forecast for an average year. So they should not liquidate all their assets only about a quarter and then have a normal supply on hand in case demand does increase. This was they are semi-prepared for whatever happens.
Another aspect that makes forecasting these sales even more difficult is that when changes to the landscape do occur it is often difficult to accurately determine how these changes will impact companies. In the article below the author discusses the potential impact of Dicks, Walmart and Kroger increasing their restrictions on gun purchases. According to the article less than 25% of gun sales occur in these big box retailers and given that many other options like small fire arms dealers and gun show sales it is very difficult to predict how sales will be affected. In this case the human element of forecasting becomes extremely difficult to determine. Will the anti-gun sentiment caused by the shooting pressure potential gun buyers away from purchasing or will the increased threat of regulation or a more limited supply push people to buy guns now.
https://www.nytimes.com/2018/03/02/business/gun-sales-impact.html
Remington’s demand forecasters must keep a keen eye on Congress and what they plan to do with possible gun bans. On the consumer side, eliminating gun sales to those under 21 and creating hefty background checks to sell guns will have a huge impact on their forecasts. So, if that were to happen, Remington is left only with the contracts with the department of defense. And based on what your blog post discusses and the brief research I looked at, the market for defense gun contracts is highly volatile. Remington seriously needs to look at themselves and the market closely and decide if they have the ability to be profitable in the future.