Wednesday, October 22, 2008

Ammo Goes Upscale

Ammo Goes Upscale

In a recent TV ad for Black Cloud ammunition, a frantic flock of ducks darts around an orange sky as a heavy-metal guitar riff chugs ominously in the background. Cut to black. A slogan pops up, each word punctuated with a shotgun blast: Drop. Ducks. Like. Rain.

The spots, currently airing on Versus cable network, are remarkably brash for the otherwise moribund ammunition market. The goal for Black Cloud's maker, the $4.6 billion defense contractor Alliant Techsystems (ATK), is to coax more dollars out of the shrinking ranks of hunters using brightly colored boxes, loud ads, and promises of premium-grade ammo made better by "lethal science." What ATK is trying to sell is, in short, a deadlier shot. "A lot of people look at ammo as a commodity," says Mark DeYoung, president of ATK's Armament Systems. "We've really gone to high-performance projectiles."

That mindset helps explain why Minneapolis-based ATK has become the country's largest ammo manufacturer less than a decade after entering the market. The maker of space rockets, TNT, and warheads pushed its way into small-caliber ammunition in 2000 with an aggressive bid to run the U.S. Army's Lake City Ammunition Plant in Independence, Mo., that made it the military's biggest ammo supplier. It has since moved swiftly into the civilian sphere, wooing hunters and police officers with creative marketing and bold promises of better performance. Military sales make up almost 70% of revenues for ATK's $1.6 billion Armament Systems Div., one of ATK's fastest-Ć½growing units. On Aug. 7 the unit reported a 32% increase in sales for the last quarter, to $442 million, while profits jumped 53%, to $44 million.

The push into premium-priced ammo comes at a key moment. Wars in Afghanistan and Iraq have sent demand skyrocketing. Lake City now pumps out 1.4 billion rounds a year—a level not seen since the Vietnam War—helping ATK shares to double in five years, to around 106. But a drop in troop levels could halt ATK's big run: "The perception is that they are very tied to Iraq," says UBS (UBS) analyst David Strauss.

Well-Heeled Hunters

Getting higher profits from the consumer segment could be tough. A round of ammo, or a cartridge, is generally made up of a brass casing packed with a primer, gunpowder, and a bullet. The raw materials used to make those components—especially copper and lead—have risen dramatically in cost over the past few years, forcing all ammo makers to raise prices.

While the hunting market may be shrinking, those who have stuck with it spend an average of $1,829 a year on their hobby. Dolph Varner of Columbia, S.C., lays out at least that much making hunting trips to Nebraska, Louisiana, and Canada. Varner buys Federal Premium ammunition, ATK's top-of-the-line brand, which can cost up to $70 for a box of 20. (ATK's Federal Cape Shock brand, for big-game animals, can cost more than $200 a box.) "Serious sportsmen do not tolerate people who cannot make a clean kill," says Varner.

That's the kind of attitude ATK likes to play off in its advertising. While companies such as Remington and Winchester Ammunition still sell their wares in bland boxes, ATK is all about buzz. Federal Premium boxes show pictures of the type of animal each round is designed to kill, from squirrels to mule deer. The box for ATK's Fusion brand is bright orange with flames encircling the brand name. Black Cloud shotgun shells claim to "wreak havoc on impact." They're endorsed by TV duck hunter Phil "the Duck Commander" Robertson, who can be seen in a Black Cloud spot knee-deep in a swamp covered in grime, grimacing menacingly as he clutches his shotgun.

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