January 14, 2013
by Hank Cardello
Last month's shooting of 26 elementary school children and adults at a Newtown, Connecticut, elementary school is beyond every parent and child's worst nightmare. It has horrified the nation. As public outrage over mass shootings mounts, and as policymakers and gun-control activists rail for change, it's time for gunmakers to do some soul-searching. If watching their products fall into the hands of dangerous people isn't enough to move them, their profit motive should.
Here is why: Gun manufacturers that see their future narrowly as selling lethal weapons are leaving lots of money on the table for non-lethal personal protection devices. Further, by sticking to guns, firearms companies will risk facing legal battles of the type that have cost the tobacco industry hundreds of billions of dollars. A 2005 law largely shields gunmakers from those kinds of suits, but pension fund managers and other investors are nonetheless starting to act as if the tides have changed. If the legal floodgates open, the smaller and less profitable gun industry won't be able to financially survive the attack that the tobacco companies withstood.
While I would prefer that a moral argument might persuade the gun industry to change its ways, especially after the murder of innocent children, unfortunately it comes down to profits and money. That's the only way to get the gun industry, or many other industries, for that matter, to change products and practices that anti-industry activists claim are harmful to the public. Money, not Second Amendment rights, is the real reason that gun manufacturers fire back when anyone seeks to ban or limit sales of their products—even the extreme ones, such as armor-piercing bullets and the Bushmaster semi-automatic "sports rifle" used in the Newtown killings. Gunmakers cling to their guns because they believe their survival depends on preserving and enlarging the market for them. They think they're all they have to sell.
From the 1929 St. Valentine's Day Massacre to the 2012 Newtown massacre, history's most notorious shootings have sparked outcries for more restrictions on gun sales and gun use. Despite the restrictive new policies that followed many such killings, from the 1934 National Firearms Act through 1994's Brady Act, the gunmakers have prevailed by championing constitutional rights, courting and threatening legislators, and appealing to hunters, young men, and other core users.
However, those strategies may have run their course. It appears that public sentiment may be turning against unfettered gun ownership after 2012's mass shootings. In a USA Today/Gallup Poll study taken after the Newtown massacre, 62% said they would favor a law to ban the sale and possession of high-capacity ammunition clips. In a separate Gallup Poll, 71% said they would support some restrictions on gun ownership; another 15% favored making guns illegal.
To be sure, the 2005 law enacted by Congress makes it difficult for firearm companies to be sued over the misuse of their products. But successful challenges to that law have already taken place. Last October, a New York appeals court unanimously held that a gunmaker, distributor, and dealer could be held liable for selling 181 "Saturday night specials" to a gun trafficking ring, which shot a Buffalo high school basketball star. And in light of Newtown, the cries for Congress to appeal the law have begun in earnest. As Vice President Joe Biden met last week with both sides in the gun debate, President Barack Obama vowed to enact new restrictions, with or without Congress. New York Governor Andrew Cuomo is pushing for a ban on assault weapons and allowing police to confiscate weapons from the mentally unstable; Connecticut Governor Dan Malloy is also calling for new restrictions.
As the anti-gun movement begins to hone its strategy, the blueprint is already in place for activists who want to pursue big legal settlements against gunmakers, using the same playbook that was successful against the tobacco industry. But unlike that industry, which staved off efforts to ban or curb smoking for decades before getting socked with a landmark $206 billion fine in 1998, U.S. gunmakers don't have deep enough pockets to survive such challenges. Their industry profit margins are much smaller—8.5% on annual revenue of $11.7 billion, according to market researcher IBISWorld.
Consider that Altria alone, which owns Phillip-Morris, is a $23.8 billion business, twice the size of the entire gun industry, with net income margins that are two-thirds higher. Moreover, investors are defecting: The California State Teacher's Retirement System announced last week that it would divest itself of holdings in gun companies that make weapons illegal in California. Harry Keiley, the fund's investment committee chair, cited not only the Newtown tragedy but also "the financial pressures we anticipate this sector of the industry will face." Cerberus Capital Management, one of the world's largest private-equity firms, is selling its holdings in the Freedom Group, a top firearms company that makes the Bushmaster. Wall Street analysts, concerned over future liabilities, are likely to recommend that other investors follow Cerberus' lead. After its investment missteps with Chrysler and GMAC (before the government bailout), Cerberus is surely capable of recognizing a big business risk.
Public sentiment and investors are turning against the gun industry, and anti-gun activists are howling for their heads. Still, gunmakers can appease the anti-gun activists, become a meaningful part of the solution to curb gun violence, gain new customers, and strengthen their bottom line—but only if their survival doesn't depend on selling more guns and ammunition. That means they need to reload in three different ways.
First, they should redefine their business model from being purveyors of guns and ammunition to encompass all personal protection products. That would open them up to a host of new and existing nonlethal devices and markets that could very well generate much greater revenue and profit than the sale of guns and ammunition generates today. For example, the U.S. electronic security market is about the same size today as the gun market, according to figures from the Freedonia Group, and is expected to hit $17 billion by next year. Some reports estimate that the global market for home security will reach more than $34 billion in 2017.
Broadening the notion of the needs they fill has been a successful strategy in numerous other industries whose core products were under attack for safety, health, or environmental reasons. For example, Chevron, which once concentrated solely on fossil fuels, now focuses on natural gas, solar power, and biofuels, and touts its "human energy" platform. Danone jettisoned less healthy products to focus solely on nutritious ones such as bottled water and infant formula. Our research shows that Danone's financial and shareholder performance has outpaced its peers'. Former soda companies such as Coca-Cola and Pepsi have redefined themselves as beverage companies, reaping new business from products like bottled water and sports drinks. Today they enjoy some of the highest operating profit margins in the food industry.
The second strategy that gunmakers should consider is appealing to new customers who don't want to use deadly force to protect themselves. Overall, a minority of households packs heat; a late 2012 Pew Research Center poll showed that homes without guns outnumbered homes with guns by nearly two to one.
Both the University of Chicago and the Pew Research Center estimate that roughly two-thirds of American households don't own guns. These people are a far richer vein of future income than the testosterone-filled young males who are the target of Bushmaster's now-infamous "Consider your man card reissued" ads. Products that offer protection from intruders are highly profitable; ADT, the home security company, is a $3.2 billion business that delivers bottom-line returns exceeding 12%.
A 2011 study by Homeland Security Research projects that the market for non-lethal weapons, at $2.4 billion in 2012, will have a 17% compound annual growth rate, as demand rises in the leading-edge law enforcement and military markets. Consider that the Los Angeles County Sheriff's Department has used nonlethal devices that combine mace and 600 lumens of light to temporarily stun a criminal, achieving a 96% "stop rate" and a 43% decrease in the necessary use of lethal force. ICD Research estimates that the global market for body armor and personal protection equipment will grow to $19.4 billion by 2022. Protective devices that use sound instead of bullets are an emerging opportunity. All in all, gun makers have a huge opportunity to make and market these devices to the majority of households that shun guns.
Finally, gun-makers need to demonstrate leadership in the public debate about the safety of their products, instead of merely playing defense. When Mothers Against Drunk Driving targeted the beer industry in the 1980s, beer companies started campaigns such as Anheuser-Busch's "Know When to Say When." They lightened up the alcohol in many beers and spent millions on public service announcements telling people to drink more responsibly. Even after losing market share to winemakers, brewers are more profitable today than ever; the four largest beer companies' profit margins more than doubled from 1999 to 2011. Many food and beverage companies have joined the Childhood Food and Beverage Advertising Initiative, which promises more responsible marketing practices. Some members, including Coca-Cola Company, Mars, Cadbury and Hershey, have stopped advertising directly to children under 12.
Gunmakers need a new message and a new mouthpiece. The NRA now looks to be more on the fringe than ever: Wayne Lapierre's statement that the Newtown mass murders occurred because of too few guns was greeted with revulsion. Clinging to the Second Amendment will no longer resonate with the majority of U.S. citizens. Most people who want to protect themselves and their families don't care about getting their "man card" reissued.
In short, gun manufacturers need a broader focus, more nonlethal products, and new messages that demonstrate leadership and responsibility in the gun debate. The costs of relying on guns and ammo alone for profits are too high for society, gunmakers, and their shareholders. The societal toll alone is horrific. The U.S. averages 87 gun deaths each day as a function of gun violence, with an average of 183 injured daily, according to the University of Chicago Crime Lab and the Centers for Disease Control. The crime lab's research estimates the annual cost of gun violence at $100 billion. Clearly, the gun industry's single-minded focus comes at too high a price.
The needs of society and shareholders are too much for gun manufacturers to ignore. By focusing on and defending their rights to sell guns, they are only shooting themselves in the foot.
Hank Cardello is a Hudson Institute Senior Fellow and Director of the Obesity Solutions Initiative.
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