Gun Business 101 explains that the primary distribution system in the firearms industry is a business-to-business (B2B) channel because of the need for a federal firearms license (FFL) to transfer guns. This largely eliminates a business-to-consumer (B2C) channel, so we looked at the two B2B methods used in the gun business.

I discussed how a dealer-direct program is one in which a gun factory sells directly to a retailer who in turn sells to a consumer and we also noted that a two-step distribution method also exists in which a factory sells to a wholesaler who supplies a retailer who makes the final sale to the end-user—the gun buyer.

What are the differences between a two-step distribution system and a dealer-direct program, and is one better than the other?

In a two-step distribution program, a factory sells to a wholesaler, such as RSR, Lipsey’s, Ellett Brothers, and AccuSport. These companies provide two valuable—some would say vital—functions for gun manufacturers.

First, they provide warehousing and shipping functions that allow firearms factories to immediately sell finished goods. In the case of hunting rifles, factories often give wholesalers long-term credit known as “dating terms” in which the wholesaler takes delivery of seasonal goods and pay for them months later. By immediately selling their finished goods to wholesalers, either for cash or on long-term credit, the factories can better manage their production and spread their cash flow.

The second important function that wholesalers provide is to serve as a credit buffer. If the factory were to sell to hundreds or even thousands of small gun shops, not only would they have increased customer service and shipping problems, as well as a larger job of accounting and credit management. By concentrating their sales to a handful of wholesalers, the credit risk of getting paid by the many “mom and pop” retailers in the gun business is passed to the wholesaler.

However, this can be a double-edged sword. If a wholesaler has problems paying—or goes bankrupt as several big ones have done in the past—then the factories take a giant loss.

There are two major drawbacks to using wholesalers in a two-step distribution model. In this model, a factory loses control of how its products are sold and marketed.

Wholesalers tend to treat firearms as commodities which leads to price wars among the wholesalers. This artificially devalues the firearms causing them to be snatched up by bargain-hunting retailers who either blow them out at sale prices to consumers or over-stock them in their stores.

The second problem is that wholesalers become the de facto sales force for the factories, which largely erodes whatever brand message the manufacturer might be trying to convey as part of its marketing strategy.

Wholesalers use telemarketing extensively to cajole their gun shop customers into buying. Telemarketing (in the gun business) is a spiff-driven enterprise in which the telemarketers (mostly women) are “spiffed” by the factories with color TVs, microwave ovens, cruises and good old fashioned cash. What gets pushed the hardest is not necessarily what the consumer is looking to buy, but whatever is being most heavily spiffed in a given week or month.

In a dealer-direct distribution program, a factory sells directly to retailers. By having a direct connection to the retailer, a factory can mandate that certain marketing, branding and pricing standards are maintained, thereby giving the factory maximum control of its brand image. Additionally, a factory can respond much more quickly to surges or drops in consumer demand by turning up or down their production as their dealers’ orders are received.

With a dealer-direct program, the factory must handle as many as 2,000 to 3,000 small accounts, which places a huge degree of importance on having good customer service, shipping and accounting departments. As noted previously, the credit risk is greater, but it is also more diluted.

Perhaps the most onerous obligation of a dealer-direct program is on a factory’s sales and marketing department. There is no one else to push the factory’s product. No bank of telemarketers, no spiff program, no super-hot sale of the week. Factories rely on either an in-house sales force or commissioned sales representative working as independent contractors.

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