From a blog I subscribe to...
Ammunition is a highly concentrated industry. There are many ammo brands, like CCI, Federal, Remington, Winchester, and Speer, but they are all controlled by two firms - Vista Outdoor and the Olin Corporation. As Elle Ekman wrote in the American Prospect, Vista and Olin rolled up the industry through mergers, as well as taking advantage of the privatization of government facilities making ammunition and government contracts... Like a lot of industries, there are cost pressures in ammunition; the price of raw materials, like brass, have gone up. Additionally, the State Department has blocked imports from Russia, adding to the pricing pressure. But the cost story is really a sideshow; the pricing increase is going almost entirely to profit. For Vista, margins skyrocketed in 2020, and continued to increase in 2021. As the CFO of Vista, Sudhanshu Shekhar Priyadarshi, told investors in November, margins rose to a record 27% in Q2 of 2021, on top of an already extraordinary 2020. According to Blinder, and most economists, competitors should enter the market and invest in new factories, or existing firms should expand existing capacity to seize market share, eventually leading to reduced prices. But the industry hasn’t experienced such competitive dynamics. Profits, said Priyadarshi, have gone to share repurchases and paying down debt. There are several reasons for this, but the main ones are consolidation and high barriers to entry in the industry. Ammunition is difficult to produce, as it requires careful manufacturing processes to safely handle explosive materials. Vista recently bought its competitor Remington out of bankruptcy, lowering the number of firms in the industry that could even build a factory and distribute ammunition effectively. And the limits on capacity were explicit. The head of ammunition for Vista, Jason R. Vanderbrink, explained that the “most important” reason for the Remington acquisition was “added capacity to Vista without increasing the overall market capacity." ...Vista has set up two pricing programs to ensure high prices and stability. The first is a subscription service for ammunition, which gives them a steady flow of ammunition demand and lets them plan production more easily. The second is, well, an informal form of price-fixing, or output reduction. They aren’t totally explicit about it, but they use code words to make the point. Here’s Metz explaining that they collude with their competition to keep capacity lower than it should be. "Now with ammunition being the largest part of our business. I mean, clearly, buying a Remington, we've created what we feel like is an even more disciplined industry now as we go forward. We've got, I think, like competitors in the sense that they watch growth, they watch their margin profiles. And we feel like we've got a disciplined industry. And I've mentioned previously that we studied, as best we can…industry capacity and making sure that we're not only managing our capacity, but very mindful of what's being brought into the industry, so we don't get over our skis, if you will.” In other words, Vista executives are planning to ensure that prices won’t come down. They have expanded some capacity on the margins, but because there are only two real firms now, they can easily pull that extra production offline if necessary. We’ve seen the management of pricing across economic cycles in other concentrated industries. Chris Leonard wrote about Tyson Food’s control of the poultry business, and how during the financial crisis this meant the entire industry could raise prices by all cutting production at once... When economists like Alan Blinder, Jason Furman and Larry Summers, discuss inflation and concentration, they are relying on the idea that markets are competitive, and that new entrants will drive down margins of existing players. This is not a crazy theory. Some bottlenecks will go away; Congress is acting to reduce the problem at the ports, otherwise known as the world’s most profitable traffic jam. But in terms of concentrated industries, is it really true that there will be mass entry with high profit margins? As we see with ammunition, the answer is, probably not... (It was quite a challenge excerpting this much longer article, which is followed by, “Welcome to BIG, a newsletter on the politics of monopoly power...” Primers are the most dangerous components of ammunition to manufacture. It is much easier and much less risky for ammunition makers to boost production by adding shifts – up to 24-hour production – than to make the massive investment in new machinery to manufacture powders and primers, with the uncertainty of how much longer demand will remain at current levels.)
i
https://www.zerohedge.com/political/what-great-ammunition-shortage-says-about-inflation
Ammunition is a highly concentrated industry. There are many ammo brands, like CCI, Federal, Remington, Winchester, and Speer, but they are all controlled by two firms - Vista Outdoor and the Olin Corporation. As Elle Ekman wrote in the American Prospect, Vista and Olin rolled up the industry through mergers, as well as taking advantage of the privatization of government facilities making ammunition and government contracts... Like a lot of industries, there are cost pressures in ammunition; the price of raw materials, like brass, have gone up. Additionally, the State Department has blocked imports from Russia, adding to the pricing pressure. But the cost story is really a sideshow; the pricing increase is going almost entirely to profit. For Vista, margins skyrocketed in 2020, and continued to increase in 2021. As the CFO of Vista, Sudhanshu Shekhar Priyadarshi, told investors in November, margins rose to a record 27% in Q2 of 2021, on top of an already extraordinary 2020. According to Blinder, and most economists, competitors should enter the market and invest in new factories, or existing firms should expand existing capacity to seize market share, eventually leading to reduced prices. But the industry hasn’t experienced such competitive dynamics. Profits, said Priyadarshi, have gone to share repurchases and paying down debt. There are several reasons for this, but the main ones are consolidation and high barriers to entry in the industry. Ammunition is difficult to produce, as it requires careful manufacturing processes to safely handle explosive materials. Vista recently bought its competitor Remington out of bankruptcy, lowering the number of firms in the industry that could even build a factory and distribute ammunition effectively. And the limits on capacity were explicit. The head of ammunition for Vista, Jason R. Vanderbrink, explained that the “most important” reason for the Remington acquisition was “added capacity to Vista without increasing the overall market capacity." ...Vista has set up two pricing programs to ensure high prices and stability. The first is a subscription service for ammunition, which gives them a steady flow of ammunition demand and lets them plan production more easily. The second is, well, an informal form of price-fixing, or output reduction. They aren’t totally explicit about it, but they use code words to make the point. Here’s Metz explaining that they collude with their competition to keep capacity lower than it should be. "Now with ammunition being the largest part of our business. I mean, clearly, buying a Remington, we've created what we feel like is an even more disciplined industry now as we go forward. We've got, I think, like competitors in the sense that they watch growth, they watch their margin profiles. And we feel like we've got a disciplined industry. And I've mentioned previously that we studied, as best we can…industry capacity and making sure that we're not only managing our capacity, but very mindful of what's being brought into the industry, so we don't get over our skis, if you will.” In other words, Vista executives are planning to ensure that prices won’t come down. They have expanded some capacity on the margins, but because there are only two real firms now, they can easily pull that extra production offline if necessary. We’ve seen the management of pricing across economic cycles in other concentrated industries. Chris Leonard wrote about Tyson Food’s control of the poultry business, and how during the financial crisis this meant the entire industry could raise prices by all cutting production at once... When economists like Alan Blinder, Jason Furman and Larry Summers, discuss inflation and concentration, they are relying on the idea that markets are competitive, and that new entrants will drive down margins of existing players. This is not a crazy theory. Some bottlenecks will go away; Congress is acting to reduce the problem at the ports, otherwise known as the world’s most profitable traffic jam. But in terms of concentrated industries, is it really true that there will be mass entry with high profit margins? As we see with ammunition, the answer is, probably not... (It was quite a challenge excerpting this much longer article, which is followed by, “Welcome to BIG, a newsletter on the politics of monopoly power...” Primers are the most dangerous components of ammunition to manufacture. It is much easier and much less risky for ammunition makers to boost production by adding shifts – up to 24-hour production – than to make the massive investment in new machinery to manufacture powders and primers, with the uncertainty of how much longer demand will remain at current levels.)
i
https://www.zerohedge.com/political/what-great-ammunition-shortage-says-about-inflation
