(wholesale) Distributors--why do they even exist?

[Creeping Incrementalism]

Can anyone justify the existence of firearms wholesale distributors? I work for a consumer packaged goods company, and we, for the most part, sell our product directly to retailers. Why are firearms different (excluding imports)--why can't manufacturers, such as Springfield or Ruger, sell directly to FFLs?

 

[XLMiguel]

I suspect it has a lot to do with the nature and maturity of the market and how the distribution channels developed. There are also economies of scale that play, and distributors service a lot of smaller retailers that the mfrs don't want to mess with. Channel contraction seems to be teh way of teh worldin many markets, so i suspect it'll happen (is happening) in the firearms business, too. JMO. I'm usre there are dealers here who can provide a better/more accurate explaination . . .

 

[Monkeybear]

I think it has to do with volume. Most places dont need enough guns from most manufactures to get a good deal on volume or to even place an order at all. wholesalers are able to buy so much that they can sell cheaply no matter how few you want and because they sell so much they can make a profit off the small markup.

 

[DunedinDragon]

Manufacturers build guns on an assembly line, not one at a time. To be profitable the assembly line has to run and not sit still. Retooling from model to model is time consuming and expensive. Someone needs to buy these large runs. The largest buyers like Academy or the government may be able to buy in bulk and warehouse, but smaller one's can't. Additionally by having distributors which act as a mid-stream warehouse, the consumer doesn't have to wait for 8 months for their gun to get made..there's probably a stash of them at the distributor. The most important reason for distributors is it allows broader access to buying something because there can be LOTS of retailers servicing the public that buy from a centralized distributor.

This sales model exists in almost every industry. The only consumer-oriented industry that doesn't do this is new car sales. Which is one of the reason car manufacturers are hit so hard when consumer buying tastes change. They have a huge buildup of inventory of old cars that don't sell.

In short, it's a successful sales model that works...that's why it's around and will continue to be around.

 

[goalie]

I would guess that the fact that the paperwork involved in tranferring the guns you manufacture to several distributors would be much easier to keep straight than the paperwork that would be involved if you dealt with every FFL in the country that wanted to buy from you.

 

[Highland Ranger]

They've got to be adding some value or they wouldn't (shouldn't?) be part of the supply chain . . . my guess is they need a distributtion network and choose to have it run by separate companies.

 

[Werewolf]

I imagine that Firearms manufacturers use distributors in order to keep their inventories low. Modern inventory control and finance stresses build it and ship it - don't keep inventory onhand. As some others have stated to deal directly with dealers would require inventory onhand to meet their requirements. Doing that violates current inventory control standards. Lower inventory equates to lower costs - that's what the academics say and that's how the accounting and finance weenies (of which I am one) have been trained for the last 20 years or so.

That said my 20 years in manufacturing which covers the fields of production, quality assurance, accounting and finance has convinced me the accounting academics are right but only to a point. Why do I say that because academics deal in the theoreticly perfect model and most of the models I've seen ignore distributors and the great deals they get. For example a normal customer usually has terms that require payment in 30 days, bigger ones might get 60. For distributors the norm is 90 and I've seen some really rediculous payment terms given to them. Not only do they get forever to pay they also get rediculously low prices too.

In effect with a 90 payment term the manufacturer is in effect just consigning his inventory to the distributor because in most cases the distributor has moved the product before payment is due. And he's selling it at a lower price than he could get from the retailer. The manufacturer might as well keep the product and sell it to the retailer directly. Cut out the distributor and the demand volume doesn't go down just the shipment size (same amount of guns just smaller shipments but sold at a higher price). Instead of shipping once or twice a month you ship once a week or even daily. Your distibution costs won't go up because you still need the same number of people to ship once a week as once a month - you're shipping the same volume just in smaller packages. What cost will increase is freight but in general you make the buyer pay freight (especially with a product like firearms).

Using distributors is a false cost savings IMO. Unfortunately the current crop of MBA's don't have the imagination to think outside of the box and do a real financial analysis and your average accountant without finance training just plain can't do it.

That said I think distributors in the firearms industry are more of a convenience than a necessity and like a well worn in pair of boots you just don't want to get rid of will be around for a while.

 

[rbernie]

This sales model exists in almost every industry.

That's a fact - very few companies have traditionally run a DSD (direct store distribution) model. The reasoning for the middleman is multi-facteted:

• it lets the manufacturer focus on the product itself (which they do well)
• it obviates the manufacturer's need to understand the marketing/sales side of things (which is often regional in flavor)
• it helps absorb the skew (elasticity) between the manufacturing and demand curves

It may look inefficient, but it is generally true that a distributor can push the product from dock to market with less cost than can the manufacturers themselves. There are a few exceptions (FritoLay, for example) but they are far between....

 

[DHFirearms]

I'll give you a good example of why distributors exist. When I tried a Glock group buy I contacted Glock to buy directly from them. They require a minimum $50,000 initial order with a minimum $25,000 order per year after that. I would venture to say most dealers, my self included, can't afford that kind of inventory to buy directly from a manufacture. But a distributor who does business with thousands of dealers can easily handle that kind of inventory.

I contacted Bushmaster about buying from them, not a problem except their 'dealer' pricing directly to me was higher then if I bought from a distributor. Its all about volume, a manufacture doesn't want to mess with thousands of dealers and their relatively small inventory. The want to produce in volume and sell in volume. Its just easier for a manufacture to sell 5,000 guns to one distributor on one big order then to sell 5 guns at a time to a 1,000 dealers all over the country.

I work for a Budweiser distributor and its the same thing, in fact their starting to passively force or push the distributors into merging with each other so they have less distributors to deal with, and we're only talking there is like 400 distributors across the country with 13 brewery's serving them all. They only want to deal with big distributors anymore, distributors that sell 2,000,000 cases or more per year. They're asking the smaller distributors to sell out to bigger ones or merge to form a bigger 2 million+ case distributor. Give it a few more years and they'll start forcing distributors to combine to meet their needs or be forced to sell out.

 

[Waitone]

Distribution is a great way of levelling out demands on production. It permits the manufacturer to gain economies of production. It also reduces the cost of doing business in that customer base is significantly reduce. Hint: operations and finance people love few large customers. Marketing people hate the idea. Sales management swings both ways. Management wants it both ways.

You mentioned participation in the packaged goods business and that you sell directly to the retailer. That particular model and its popularity is of comparatively recent history. Manufacturers were able to take a big hunk of cost out of their structure by capturing the costs that essentially went to distribution and either pocketed the excess or passed it along to the ultimate customer in a price reduction (e.g. WalMart model) What has not changed is the need for inventory. WalMart merely changed its channels of transportation into its warehousing. The need to hold inventory did not go away just because WalMart is smarter than anyone else. It just opted to use transportation as a means of holding inventory.

I'm sure there are a few legal reasons to using master distributors but I suspect the major reasons have to do with industry economics.

 

[DunedinDragon]

Waitone said,

That particular model and its popularity is of comparatively recent history. Manufacturers were able to take a big hunk of cost out of their structure by capturing the costs that essentially went to distribution and either pocketed the excess or passed it along to the ultimate customer in a price reduction (e.g. WalMart model) What has not changed is the need for inventory. WalMart merely changed its channels of transportation into its warehousing. The need to hold inventory did not go away just because WalMart is smarter than anyone else. It just opted to use transportation as a means of holding inventory.

That's not exactly a good comparison as Walmart isn't a manufacturer, and their model of by-passing distributors has been around since Sears & Robuck. That's what drove the big department stores in the first place. Yes, they all cut out costs by bypassing distributors and absorbing warehouse costs, but it's at the opposite end (retailer versus manufacturer).


Werewolf said,

Using distributors is a false cost savings IMO. Unfortunately the current crop of MBA's don't have the imagination to think outside of the box and do a real financial analysis and your average accountant without finance training just plain can't do it.

Again, the theory of being both a manufacturer AND a wholesaler sounds like you're taking costs out of the system, but in practice it doesn't work very well. The reason is a business fundamental best practice called, "Stick To Your Knitting" meaning that if you are in the car manufacturing business you should ONLY do things that are related to car manufacturing because that's what you know, what your hiring model is geared toward, and what you are best at. When you try and expand your role into more and more support aspects of the business you find that's not your forte' and typically aren't very efficient at it.

It's not like all that a distributor does is take orders and ship orders. If you've ever worked with any kind of distributor you realize pretty quickly it's a highly competitive sales and promotion business and very people intensive. If a manufacturer were to try and take it on it would dilute their attention and efforts toward things that REALLY relate to what's important to the consumer: R&D of new products, efficient manufacturing, Quality Control Testing, etc.

Therefore the REAL value the distributor plays is allowing manufacturers to keep focused on producing quality products and servicing the products they produce. I'd personally rather have Sig and Glock doing that than making calls on gun stores to see what they want to order this week.

 

[DHFirearms]

Don't forget Walmarts model is to bully mfgr's. As in "we'll give you a contract to buy 10,000 of your widgets per year but we'll pay you $10 less per widget so we can sell them cheaper than anyone else and still turn a hefty profit"

+ we only pay our employee's $7 an hour and wonder why they don't care about doing the proper paperwork on gun sales and we get the crap sued out of us. But then again I hate walmart so my opinion is biased.

Actually it is a good business model, obviously their loaded $$$$. But it works at the expense of people, they don't pay good wages to the people on the floor, they nickle & dime their mfgr's causing them to be able to pay less, etc... Its always at the expense of the working man & woman, thats what I hate about it. I read an artical a few years back that said the new corporate business model was "...people are resource's to be used and then discarded as needed." Pissed me off to no end.

 

[dfariswheel]

One key reason, can you imagine the mess it would be for ONE warehouse operation to sell and ship one or two guns to hundreds of thousands of dealers located from New York to Hawaii?

Plus keeping track of who's who, and whether their FFL is in order and current, not to mention the billing and payment nightmare.

It simply makes more sense for a manufacturer to ship larger shipments to several dozen big wholesalers, and for the wholesalers to ship to FFLs regionally.

 

[1040]

Further,

distributors have contracts with most or all of the firearms manufacturers. Therefore the retailers only need one source from which to purchase all of their firearms, saving time in ordering and reducing shiipping costs.

 

[Jim K]

Another factor, probably not unique to the firearms business, but definitely a factor in that business, is production itself. Most manufacturers have an extensive catalog line, but are too small to keep all items in production at the same time. So they run off what they hope will be, say, a 3 months supply of Model A, then convert their machines to produce Model B. They make 3 months supply of Model B, then shift to Model C, and so on. By the time their stock room and distributors run low on Model A, it is time for the cycle to start again with resumed production of the Model A.

The distributor provides storage space for those guns.

Jim

 

[Robert Hairless]

So the Bush administration isn't to blame for imposing distributors on us as a way to infringe upon our Second Amendment rights?

 

[DunedinDragon]

Amazingly enough, there's just nothing to blame Bush for here....but that doesn't mean the press and the dems aren't going to try..

 

[Graystar]

Another important service that a distributor provides is one-stop shopping. A store owner may have 4 or 5 distributors that supply him with products made from a large number of different manufacturers. That’s one call, one shipping charge, and one invoice instead of having to place 50 different orders. Store owners of many retail types rarely have such time to waste ordering goods.

 

[Creeping Incrementalism]

Thanks for all the responses. I think the best point is, that's just the way it’s always been done, and manufacturers are used to it. “Stick to your knitting” is a good point, but I don’t think that would be a disadvantage with this industry.

I didn't realize that DSD was uncommon (The CPG company I work for is the only one I've ever worked for). What didn't occur to me when I posed this question is that our main competition uses distributors, while we use DSD and only use distributors where the economies of scale don't justify us using our own trucks--places where we wouldn't sell enough product to fill up a truck, but a distributor, carrying products from multiple manufacturers, could.

The main reason we use DSD is because we have more incentive to sell our own product than a distributor does. See, a distributor doesn't really care what he sells, as long as he sells a lot of something. You have to rely on "pull" from the consumer/retailer. When you sell it yourself, it is easier for you to "push" it.

I know the hassle of collecting from many small retailers, because I work closely with the people who do. But that's how my company grew, so I guess were used to it, while in the gun industry, they all grew using distributors, because that just happened to be the way things already were, so it might be hard to change.

Even though I'm not being an expert in this, I still think gun makers would do better "pushing" their product, since firearms are a very controlled and almost "niche" industry, that can't easily advertise to a mass of consumers and thus help create pull. I mean, a lot of shooters don’t ever read gun magazines, or hang out at the range, or gun shops all that much. They don’t really know what’s out there; they just bought whatever was convenient at the time. I have to spend a lot of time researching to find out what’s good and what’s out there with guns. It’s kind of like that with guitars or musical instruments—does anyone know if that industry uses DSD or distributors?

I also find distributors to be annoying as a consumer. Me to gun store clerk: "Springfield has product X on their website, could you order it". Clerk: "Uh, I only ever talk to the distributor, and they don't list it." Having a distributor just creates a level of bureaucracy between the end-user and the maker.

 

[rbernie]

I also find distributors to be annoying as a consumer. Me to gun store clerk: "Springfield has product X on their website, could you order it". Clerk: "Uh, I only ever talk to the distributor, and they don't list it." Having a distributor just creates a level of bureaucracy between the end-user and the maker.

That's not a distributor issue, thats a lardbutt local store issue (not being willing to work with multiple distributors to get you what you want).

 

[Creeping Incrementalism]

But if manufacturers sold directly to gun stores, even lardbutts could get it right.

By the way, the clerk I am paraphrasing is quite overweight.

 

[rbernie]

But if manufacturers sold directly to gun stores, even lardbutts could get it right.

Having spent years on the DSD automation side of things for a major CPG company - no, they can't. Folks that can't be bothered to try, well, can't be bothered to try....