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What is the relation between the manufacturers & the discount stores?

What Is The Relationship Between The Manufacturers & The Discount Stores?

Among the questions SI receives each month there are always several, addressed to various manufacturers, about their relationship with discount stores. Here are several examples:

"Manufacturers, quit selling to bargain stores. You are putting the small businessman out of business!"

"Why are small dealers subjected to high distributor prices and expected to compete with discount stores?"

"Why do you allow the discount houses to market your products for less than a dealer can buy them?" "How can you allow your products to be sold as loss leaders?"

Almost every one of the questions mentioned one of several of the major discount chains by name but it really doesn't matter, for they all operate much the same way. In fairness, I'll use "discounthouse" and you can fill in the blanks. These laments are hardly new and, over the years, I've spoken with a number of industry executives about the situation and gained an appreciation of their perspective. Of course, I have also talked with dealers and am sympathetic to them as well. So answering these questions is going to put everyone in an awkward position and the chances are good that some of you won't like what I have to say.

The discount houses draw fire for selling some products for less than you can buy them from a distributor. But whose fault is that? Can we blame the manufacturer or should we blame the discounter? As I see it neither are at fault. Both are following the time honored American tradition of free enterprise. Some of you may remember from many years ago when most consumer items were "fair traded" and prices were, essentially, fixed by the manufacturer. The Fair Trade Laws were abolished and that's why we now see "suggested retail" prices. Price fixing is something that gets folks in trouble Manufacturers have absolutely no control over the price for which someone sells their products.

This is so important that it bears repeating. The manufacturers do not "permit" their products to be sold as loss leaders or anything else. They cannot fix retail prices: that's illegal. Nor is it fair to say the manufacturers are putting anyone out of business.

So you say to Remington (for example): "Don't sell to such and such discount house." Well, I suppose they could do that, but look at it from their perspective. If you were a manufacturer could you afford to turn down a customer who bought tens of thousands of your product and paid cash? No matter how large the manufacturer is, they can't ignore orders that amount to millions of dollars.

There is also a widespread perception that there's a different price structure for the big discount houses. Obviously this is something that's almost impossible to get hard evidence about, but a friend at Remington assures me that the chains pay the same price as any other high volume direct dealer. If that's the case then it may well be true that guns are used as loss leaders. That's another time honored tradition of volume marketing...and still beyond the manufacturer's control.

But there are other strategies in the discounters marketing. Have you ever noticed that the two predominantly male-oriented departments -- sporting goods and automotive -- are always located at the back of the store. That's not by accident. You have to pass by virtually everything else in the store to get there and the opportunity for you to buy items, on impulse, on which they make a higher profit is what they're after. If you buy guns or ammo on which their margin is probably only a few percent and also happen to pick up something on which they make 100% then it worked. And if your wife or girlfriend is along there's a chance that she'll see something as well. Stacking the deck is only wrong in card games.

One point made by several of my industry sources is that the huge volumes of the discount houses offer economies of scale that are out of the question for the average gun shop. We all know that if you take advantage of the maximum discounts and pay cash, you can reduce the net cost of an item. We're all familiar with 2-10 net 30 terms which allow a 2% discount for an account that is paid within ten days. Well, if you only owe $100 to $2.00 discount may not be particularly attractive, but if we add some zeros and the bill becomes $1,000,000 and $20,000 discount looks really good.

They then are in the luxurious position of being able to decide how much money they want to make. If may be wise for them to settle for a small margin on a shotgun, for example, and move their entire stock in a month or so, than to set a higher retail price and have inventory collecting dust. They also operate on a highly seasonal basis and turn their inventory dollars as much as four or five times a year.

I know a lot of people who own or operate gun shops and I can't think of a single one who got into the business as the result of a reasoned choice of retail business. All became progressively involved in a hobby and I've heard more than one person state that: "My hobby got out of hand." This isn't meant to be critical; it's simply an observation and I'm sure it's not a universal truth, but you can bet the discount houses aren't hobbyists. Their decision to sell firearms is simply based upon selling a product on which they can make money or one that will attract customers into their stores. They have highly paid experts who know the business of marketing (not to be confused with selling) and their stores are carefully planned to capitalize on the location of various products. Grocery stores do the same thing and carefully space products everyone needs among salad bars, luxuries, or something usually bought on impulse. Gun shops don't lend themselves to this sort of arrangement, for few people come into the store for life's necessities anymore. We are dealing with a business that specializes in items that are bought from discretionary income and most customers can't be faulted for buying what they want at the best available price either.

I know full well that a small dealer simply can not recognize the economies of scale of an organization that is hundreds of times larger. It's a fact of life and I don't foresee any basic change in the American economic system that would make things any different. I would love to be able to offer a pat solution or something that would automatically solve all the problems. Of course, they didn't arise overnight and they won't go away that way either.

But I do believe that it is possible for shops to coexist with the discounters by capitalizing on their weaknesses. And, yes, they have some (big weaknesses) in the areas of product knowledge, service and variety. They "cherry pick" the lines and there are still plenty of popular products that they don't carry. And this leaves a niche for the dealer who is willing to specialize and exploit those areas where you are better equipped to meet a customer's needs.
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Author:Petty, Charles E.
Publication:Shooting Industry
Article Type:column
Date:Jan 1, 1989
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