alashnikov, maker of AK-47, looks to rebrand

A shipment of Kalashnikov rifles, popularly known as AK-47s, was destined for the United States when it was stopped and quickly rerouted to Venezuela. Washington had just slapped Moscow with sanctions over the Ukraine crisis, and the Russian gun-maker Kalashnikov Kontsern suddenly found one of its biggest markets off limits.

Without access to the ready buyers among US weapons enthusiasts, Kalashnikov had to change its strategy, an increasingly common challenge for Russian companies after the imposition of sanctions.

In the two years that followed, Kalashnikov diversified into new product lines, slashed jobs and made over its brand. And the rifle - long the weapon of choice for militaries and militant groups and the world’s most widely used firearm - was pitched instead to hobbyists and hunters in Russia.

That new strategy appears to be yielding results. As Kalashnikov steps into the void left by US competitors in its home market, it is on track to turn a profit this year, bolstered in part by a weaker currency.

“They started paying attention to clients,” said Dmitry S. Balyasov, a lawyer and shooting enthusiast who was patronizing a firing range outside Moscow.

“They have a contemporary style for selling a product,” Balyasov said, clutching a legal, civilian version of the weapon.

For the company behind the 70-year-old weapon, the shift from serving conflict to serving consumers has been stark.

The company owns the original license to Kalashnikov-pattern rifles, colloquially known as AK-47s - a name derived from the Russian word for automatic and the surname of the inventor, Lt. Gen. Mikhail T. Kalashnikov, as well as the year the prototype appeared. In the Soviet era, Kalashnikov’s main rifle factory, called the Izhevsk Machine Works, was a state-owned military enterprise that stamped out guns in tremendous quantities with sales an afterthought.

Kalashnikov-pattern rifles are ubiquitous in conflict zones. More than 100 million have been sold, including the countless knockoffs the rifle has inspired from China and elsewhere. The chunky guns, with their oversize banana clips, are legendarily rugged, and can remain in armories for decades, limiting sales of new weapons.

With the military market largely saturated, Kalashnikov became increasingly dependent on civilian weapons sales. The civilian versions shoot only once with each trigger squeeze, with no option to switch to full automatic as in the military rifle.

Before the sanctions, Kalashnikov’s plan for expansion focused on the United States, where gun ownership laws are more lenient than in many other countries.

Though Russian weapons make up a tiny piece of the US market, sales of its civilian rifles and shotguns branded as Saiga and Baikal increased at a faster pace than the overall market. By 2013, the United States accounted for about 40 percent of the company’s total gun sales, roughly equivalent to the volume bought by the Russian military, where every soldier is equipped with one.

US sanctions slammed the door on the expansion plan. The sanctions in mid-2014 took direct aim at Rostec, the state-owned military industrial conglomerate that holds a 51 percent stake in Kalashnikov.

They forced the gun-maker to take a hard look at its business.

“We are moving from iron to intellect,” said Vasily Brovko, the director of strategy and communications for Rostec.

It thinned its ranks of middle managers at the Izhevsk factory in 2015, and diversified this year by buying companies that make motorboats and surveillance drones. While Kalashnikov does not break out sales receipts from its various divisions, it intends for firearms and clothing to make up about 80 percent of earnings by 2020, with motorboat and drone sales accounting for the rest.

A Kalashnikov-brand clothing line is being unveiled in September, and the company plans to open 60 retail stores in Russia by the end of the year, selling clothes and rifles. It also introduced a marketing campaign, with a new logo - a stylized letter K, with a curved ammunition magazine as one of the arms - and a slogan, “Kalashnikov: Real. Reliable.”

“Kalashnikov is a global brand,” Vladimir Dmitriev, the company’s chief of marketing, said, likening Kalashnikov to Ferrari or Caterpillar, companies that sell clothing as a sideline to capitalize on brand recognition. “We are certainly justified in thinking that clothes and souvenirs with our symbols will be in demand, as much as our primary products.”

In Russia, Kalashnikov must navigate a different environment than in the United States.

Russian consumers can buy a long-barreled firearm only with a police permit. Potential buyers must have no criminal record, a diploma from a gun safety course and a medical certificate that clears them of any mental illness. With few exceptions, civilians are not allowed to own pistols.

Kalashnikov is playing to patriotic ideals.

As part of a marketing effort, the company erected a stand festooned with balloons promoting the rifle in Moscow’s Gorky Park on May 9, Victory Day, the holiday commemorating the defeat of Nazi Germany in 1945. The type of display - one associating itself with the Russian government and army - is a contrast to the United States, where anti-government sentiment is strong among the gun-buying public.

The company is showing signs of improvement.

It says it expects to report a profit of 2.1 billion rubles ($33 million) when 2015 results are published this month, compared with a loss of 340 million rubles in 2014. It now sells fewer guns, but makes more money on each.

But the biggest boost for Kalashnikov comes from factors beyond its control.

Russia is a major oil exporter, and weak crude prices coupled with the sanctions helped cut the value of its currency. With most of its costs priced in rubles, Kalashnikov products became far more competitive with imported firearms.

“We are talking about the reversal of the Dutch disease, which Russia has been suffering,” Vladimir Osakovsky, chief economist for Russia at Bank of America Merrill Lynch, said. Dutch disease refers to the effect energy prices tend to have on an oil-producing country’s currency, pushing it higher and hurting domestic companies by making their exports look comparatively expensive.

Whether the growth is sustainable or the product of favorable currency winds will depend on Kalashnikov’s ground campaign.

As part its broad new marketing effort, the company now sends representatives to gun stores across Russia to promote its products. At the Hunting Club gun shop in Moscow’s suburbs, Kalashnikov has provided two window displays exclusively for its rifles, and racks and shelves to sell branded T-shirts and shoulder patches.

“The idea is to surround the customer with the brand, so he is not tempted to spend money anywhere else,” Brovko, the Rostec strategist, said.

With the help of the currency tail winds, demand for Kalashnikov’s shotguns and rifles at the shop has outpaced that for guns made by its rivals, like Beretta of Italy, Sauer of Germany and Winchester of the United States, according to Alexei V. Lapshin, the owner of the Hunting Club. Customers have also been pleased with the range of special options, including different materials for the rifle exterior, he said.

“It’s a very modern approach,” he said. “Some people want black plastic, some people want beechwood, some people want walnut.”

“No two comrades have the same taste.

source : gulfnews