Sandy Hook and the Economics of Mass Murder

As TTAG’s resident FFL/industry contributor, I’ve been asked to write a one-year-later story about the tragedy at Sandy Hook as a segment of multi-part articles about the gun industry. Reader discretion is advised. This is an ugly business. Many gun dealers are hesitant to discuss the ugly truth, but I get to blog anonymously and share insights that many of you have come to enjoy. Let me be clear about something up front – this piece is an op-ed and is bound to shock and offend many of you. So if you’ve got the stomach for it, read on . . .

Rolling into the season in 2012 (the gun industry has seasons, hunting season/Christmas namely) the industry had several factors to contend with that I have discussed in the past. Q4 is where we make our money and pay the bills. Many dealers myself included typically post double/triple/quadruple sales volumes from summertime. We run out of stuff because our vendors run out and there is nothing to ameliorate the issue. Too many gun owners chasing too little product is something that happens with anything popular in season, and new, hard-to-find items. Retailers order heavy for the season which depletes inventory at the wholesalers, and the supply chain tightens up as it does every year. Every December I run out of Gen 4 Glock 19′s no matter how many I order. It’s just a way of life.

The big factor in 2012 was that Barack Obama was up for re-election. If anyone remembers what happened in 2008, you should recall a massive gun run that was, until then, unprecedented in nature. A smaller level of panic buying also happened during the John Kerry/GWB election – people were treating the potential of a Kerry administration the same way as they were Obama first and second terms.

One joke I love to tell people is that if they went to the Olive Garden and they ran out of pasta, people would laugh and never return because what kind of Italian restaurant runs out of pasta? That can’t happen! Guess what? In the firearm industry, it can happen, it does happen and it will happen every year. Especially during election years because of one glaring fact: dealers have already stocked up due to election paranoia.

What this means: the wholesale channel is not as stocked as it typically is. This is going to put a crunch on hard-to-find items in both the present and the future. Should there be a post-election rush, the retail channel will clear out and Christmas shoppers won’t have much selection.

Hunting season also takes a lot of specialty items off the hands of vendors, Mossy Oak rifles and shotguns, etc., so the same thing applies to that merchandise. A camo Remington 870 can be just as hard to find as a Glock 19 when the season is in full swing and everyone who got their yearly bonus is out shopping. Never underestimate the buying power of the crowd of gun owners who think guns are only for hunting. They spend just as much, if not more, than some of the high speed low drag aficionados.

For the 2012 election, I made quite the parlay. I made a slap bet, a dinner bet and a 300 electoral vote over/under with friends in favor of our lord and savior, Barack Obama. This was not a political statement so much as a realization that Mitt Romney was not going to win and the fact that I really wanted a dinner at Morton’s paid for by someone else, and the chance to give my good friend Joey P. a slappy new year.

Governor Romney sold out Massachusetts gun owners and he became an NRA member when convenient. It’s my opinion that if he’d made it to the White House and a deal were posed to pass an initiative that he supported that involved the total and complete sell-out of gun owners, it would be a done deal. My opinion is based on his voting record and comments on the subject, not an attempt to be a fear-mongering gun dealer shouting that people should buy whatever I have in stock before it gets banned.

Sidenote: I truly believe that kind of salesmanship is dirty pool. If someone comes in and wants to buy something they think will be banned, it’s the job of the dealer to take their money and run, not to engage in similar histrionics. Besides, I can’t compete with the NRA in the generating-complete-and-utter hysteria-out-of-nothing department.

Product-wise, anything AR15-related was very tough to buy wholesale going into the 2012 election season, particularly ammo, stripped lowers and uppers. My sales theory for 2012 encompassed the following:

Obama victory: People are going to clear the shelves. Oh no! Obama is back! Lets buy guns! Dealers WILL raise prices in light of new demand.

Romney victory: People are going to clear the shelves. Hell yes! Obama is gone! Lets buy guns! Dealers may raise prices in light of new demand.

If you know your history, this is nearly a word-for-word redux of 2008′s election. When I opened my door in 2010, I had people wanting to trade stuff in they bought the day after Obama won “just in case” and they overpaid big time. Should someone wish to be part of this thundering herd, buying guns at high prices, it’s a free country and I’m going to take the money and run. Bearing in mind that ANY gun owner who actively fears a legislative shift should already have one or two items that would be grandfathered under such legislation.

I stated quite firmly to all my customers that should demand ramp up going into and after the election, I WILL raise prices as will others if demand warranted. Partly due to the election, partly because every year I have people that fail to plan ahead. For the record: planning ahead pays off. Several of my regular customers did all their shopping for the season on Black Friday/first week of December. I love them. They know what they want, they’re low stress and they won’t be the kind of people who inevitably call me asking for a KSG or a Larue OBR three days before the 25th with overnight delivery.

Now, I can deal with stupid. I can deal with unrealistic. I don’t deal well with both. If you are stupid enough to call me wanting, for instance, a S&W Shield 9mm a week before Christmas (this was THE hard to find gun in December of ’12 that I consistently got $700 for), I’m going to find it somewhere in the USA, buy it for the least I can and sell it to you for $875+ tax. That’s the business we are in.

So, what happened after the 2012 re-election of Barack Obama?

Five things that I discussed above happened with a startling intensity and speed that shocked me.

  1. Wholesale supply channels emptied out overnight.
  2. Demand vastly exceeded supply.
  3. As a result, prices rose across the board from wholesalers to retailers as discounting was no longer needed to sell product.
  4. People were being stupid, yet again.
  5. Product become more difficult to find.

My email inbox on election night blew up. I mean it got stupid in a hurry. I had a bunch of AR15′s in stock that I’d put up in ads with promo pricing on the week prior to the election. Everyone asked me for quotes + shipping and they did not buy. I stock Colt 6920′s consistently and the morning of Decision Day 2012, one of my primary vendors had 500 units in stock. As the day wore on and Nate Silver worked his magic, there were 300 units in stock. By the time CNN called the race for Obama, they were sold out.

Think about that. Over 500 Colt 6920′s, gone in one day. That’s one model rifle.

The following morning, I had 30 emails from people wanting this rifle that vendors had sold out the day before. I told them I intelligently hedged my bets and had 10 on the way in from an order the previous week and UPS had them in transit. They said, great! I’ll take one if you can honor the old price!

No.

If I can order it and it is readily available, my markup is X.

If I cannot order it (demand clears the shelves) and it is NOT readily available and I have it and everyone else does not, my markup is substantially more than X.

These people didn’t plan ahead and their pennance is that they are going to pay 30-45% more on an that gun than if they were to have bought it three weeks before the electon cleared out stock. The product that was at vendors all went to allocation mode, which is a fancy way of saying that said vendor could have 500 S&W AR15′s come in later that day, and they’re not going to sell them to just anyone, they’re going to sell them to their best customers. I tell people to plan ahead. And this is why.

Ammo fell squarely into the same category. I got three calls right after the election for 10,000+ rounds of ammo. The one problem: there wasn’t any ammo to be had. Period. This was the same bunch of dealers/hoarders/speculators that bought the 6920′s.

Personally, my business acumen tells me that if I sell ammo at $1/box markup and I can get it in regularly, I can live with that. If I can’t restock that item for five months, my margin has to increase correspondingly.

I sold a customer 2,000 rounds of XM855 the week before the election at $375/thousand. After election day, he calls back asking if he can get more. I tell him sure. $450/thousand, on the basis that my vendors sold 40,000 rounds of this SKU in 12 hours. They do not have any more to sell me.

His response?

“Can you do better on the price if I get 10,000 rounds?”

I asked him to try something, which was to go to New Jersey after Hurricane Sandy, find a gas station and say “Hey, can you do better on the price if I buy 1,000 gallons?”

There just wasn’t any to sell.

Wholesalers dropped freight discounts and eliminated a lot of promotions… all because they didn’t have to discount to sell product anymore. Overnight, everything went to allocated status. Smaller dealers who have existing limited access to high demand products got squeezed even further.

Now, many of you who have read this far are probably wondering why I discuss the election before I discuss the school shooting. That’s because the event timeline for 2012 had a very strange confluence of three seemingly isolated events.

1. Christmas/Hunting season clearing out product as usual

2. Election season clearing out product more aggressively than usual in the black rifle category

3. Adam Lanza

What events numbers 1 and 2 did was set the table for event number 3. To be clear, post election, demand was high. But it was not, I repeat not at 2008 levels. I had some high net worth individuals shake their head at paying any type of premium for a black rifle. That was fine because for each one of them that said no, I had one who gladly paid my price. Product became hard to come by and the demand premium went into effect. Laypeople got very upset that that dealers raised prices overnight because of the shortage and they likened it to price gouging.

I continue to stand by the statement I made in 2012 regarding the shortage of black rifles. Oddly enough, you can apply the same statement to the present state of 22LR ammunition: there is no shortage. Capitalism has just been on hiatus since 2009.

We raised prices because, in a sense, the tail wags the dog. When I normally sell a Colt 6920 for $1150 and I can talk someone into buying it for $1300, the new market price is $1300. Anyone who sells them for more than $1300 is a better salesperson than I am, and anyone who sells them for less than $1300 is not as talented.

Firearms are, effectively, affordable luxury goods. No different than any other commoditized item like premium fair trade organic coffee beans, HDTVs or iPads. Demand went up, supply went down and those who didn’t like it should have bought their black rifles in July and not rolled the dice on an election clearing out warehouses. Note that the price hike was limited mostly to black rifles. Other commoditized firearms did not have a corresponding rise in pricing.

After the election, several things cooled down. Some guns started trickling back into stock and availability was still limited, but if you wanted to put AR style guns on the shelf – you could. You just were not given any choice on selection. This is where the dealer who bought 10 DPMS Oracles and BFI Carbon 15′s got lucky in January. Things went back to “normal” a few weeks after election day. Dealers couldn’t get ammo or any hard-to-find stuff, but if you wanted mags or other smaller things like a Glock 17, wholesalers had plenty.

What the election, Christmas and hunting season did was take so much product off the market prior to the Sandy Hook shooting that prices had nowhere to go but up. Here’s the post shooting play-by-play:

Friday, December 14 2012.

Business as usual at FC HQ. ATF did an audit earlier in the month so as they were combing through books, I was shut down to accommodate. This happened to be a blessing in disguise. While this was going on, I took the time to talk to vendors and I ordered every Colt 6920 I could get my hands on as some product was being made available. Wholesalers were letting 2-4 guns out the door every day to each account just to keep larger accounts from taking up all the supply. I can understand and can respect that. It levels the playing field.

Then I see a news blurb about the shooting. The phone starts ringing. I start knocking down 6920′s at $1050 – which is higher than pre-election prices and I sell a few.

I don’t think anything of it. I figure it’s a speed bump – no different than the Colorado theater shooting, Ft. Hood incident or the Sikh temple in Wisconsin.

Saturday, December 15 2012.

I’m at a gun show and I bring four rifles to the show, which is four more rifles than I normally bring. I see no panic buying whatsoever. One person actually needles me and asks me to sell him a gun at a price that involves me paying him $20 to take it off my table. He says he just wants the best deal possible and goes away to buy it at another dealer.

Sunday, December 16 2012.

I see emails about Diane Feinstein flapping her gums and I got an email from one of my sales reps. Saturday night, dealers ordered every single Daniel Defense, Colt, Bushmaster, and S&W rifle in their warehouse. Every black rifle they had in stock, gone. Overnight. Every single PMAG in the building? Gone. Overnight. He wants to know if I know anything. I say no and I wander around at the show. No panic buying, no changes in prices. All my stuff is priced reasonably and I’m wondering what will happen. I leave prices the same. The show closes, I see one or two black rifle sales but nothing worth noting. Seems like business as usual as I haul all my rifles back home.

Monday, December 17 2012.

This is when the wheels came off the wagon. For 12 hours straight my phone rang off the hook. My entire day consisted of the following:

Moron: “Hi, I see you are a dealer for…..”

FC: “Yes I am and no I don’t have what you are looking for.”

Moron: “You don’t even know what I want yet, how can you know?”

FC: “Stripped lower or complete rifle?”

Moron: “….yes.”

FC: “Don’t have any.”

Twelve hours of that. Straight. Combined with emails. Everyone seemed to be wanting rifles.

A high net worth individual called freaking out. I tried to talk him out of a panic buy. Sold two 6920′s to him at $1300 each. He didn’t even blink. I start wondering what the hell is going on. I started calling vendors.

One vendor’s dealer portal was shut down. Could be DOS attack or could be so many dealers are ordering product the system went down.

Other vendors, I can’t even get on the phone. I’m confused.

Tuesday, December 18 2012.

The phone rings off the hook all morning. I cannot get any 4473′s or NFA paperwork done. I don’t take any incoming calls after lunch because I have to concentrate on higher priority things. Talking with vendors, a lot of items are now allocated. Glock 19′s are even tough to come by. There isn’t a PMAG in the country that can be bought wholesale. Discounting has been eliminated. One of my reps talks about the potential for even further tightening of inventory, as in all accounts at X wholesaler will be getting no more than a certain integer of product.

This scares me.

If accessibility to product is further restricted, not just on black rifles, anything firearm-related is going to go up in price. For every profit center I lose, I have to make it up elsewhere.

Wednesday, December 19 2012.

More of the same. I write $13,000 in sales over the phone. All day long people are chasing product that I couldn’t get a month ago.

In summary: the panic buying started on Monday with no signs leading up to it. Attitudes are shifting. More dealers are being accused of price gouging which, according to the consumers, encompassed having an ad that stated $X before the shooting and then raising it to correspond to market conditions.

Here’s the bottom line: As long as I have been in the gun business, people perpetually state that they can buy whatever gun I have on the shelf cheaper via Bud’s Gun Shop or Gunbroker from another dealer. If a buyer can say “I can get it cheaper on Gunbroker” and demand a lower my price to make the sale, I think that’s fair.

But turnabout is fair play when I can say, “I can get more for it on Gunbroker” and demand a higher price to make the sale. Welcome to the USA. That’s a competitive marketplace. That’s capitalism. Every business that exists raises prices when supply goes down and demand goes up. But in the gun business, that’s viewed as price gouging.

As far as price shocks go, it is my view that price shocks are bad for the firearm industry. For that matter, price shocks are bad for any commoditized industry. That small gun dealer that just opened up in October of 2012? He’s in for some problems. If he started out a month before the election and can’t get product, he’s not going to make any money and will likely close the doors.

Having 20 Colt rifles on the rack, I sold them and I doubled, and in some cases tripled, my money. Great! I’m the best gun dealer on the planet! Go capitalism! Right? Wrong. Even with those margins, the product is unsustainable. Should a dealer not get any more in for a year, how do you expect a steady cash flow? That’s bad for everyone.

High net worth individuals and well-financed speculators run the table in a post Sandy Hook market environment. That S&W optics-ready carbine that I had priced at $875 that nobody wanted to buy? Sold it for $1200 after election day. The guys who get screwed are the guys who don’t have money. That’s business as usual. FC protip: Don’t be poor. For a dealer, there is no incentive to discount anything when people are buying whatever they can get rather than what they want. Expecting a dealer to cut you a discount is laughable. If you don’t have money, you will get screwed over by the guy who does.

Building on the idea of discounting, I suspected that our wholesale vendors would tighten credit lines as they don’t need to finance inventory to make sales. Their finance department might say, ‘Why should we wait 90 days to get paid when the dealer is going to flip that and make $2300 a gun tomorrow? We should get paid now!’ That actually happened. Terms that are typically generous for Q1 buying were cut back substantially, free freight promos and other allowances disappeared instantly. People complained that unless our costs went up, raising prices of product was unjustified. Technically, our costs did go up. That is, when we were able to actually buy product.

So after Newtown, everything during Q1 went totally batshit insane. I was waiting for PMAGS to hit $100 each, Colt 6920′s to hit $3000 and 5.56 ammo to hit $2/round just so I could sell my business and personal stash of guns and magazines and make enough money to retire and never look back. As Dirty Harry once said, a man’s got to know his limitations. That was my limit. But fortunately it never came to that.

(to be continued…)