National Automobile Dealers Association data shows there are 16,802 franchised new-car dealerships in the United States, and they wrote more than 316 million repair orders with service and parts sales of more than $114 billion in 2017. These are big numbers, and among them are oil changes which, based on Petroleum Trends Internationals data, account for close to 195 million gallons of passenger car motor oil and automatic transmission fluid valued at $1.7 billion, or roughly 35 percent of the do-it-for-me class of trade, in 2018.
New-car dealers typically complete 35 to 45 motor oil and 3 to 4 transmission fluid services a day, which is 600 to 1,000 gallons of lubricant a month. In some metropolitan areas, its not unusual for large new-car dealers to move through 15,000 gallons a year or more of motor oil alone at a cost in the area of $125,000. But where new-car dealers used to offer opportunities for most lubricant manufacturers and marketers with good products, prices and a sales pitch, times have certainly changed. Genuine oils are the reason why.
Genuine oils are lubricants marketed under an original equipment manufacturers trademark. Although these products are generally blended to meet the latest API service classifications, some, as seen with General Motors Dexos, are formulated to meet OEM-specific requirements.
Whereas genuine oils are certainly considered quality products, new-car dealers historically shied away from them due to their higher price. Instead, they turned to products with high brand recognition and value brands. Dealer interest in such brands, however, has significantly declined over the years due to programs offered by OEMs that encourage use of genuine oil. These programs provide return allowances, financing, promotions and other incentives realized by reaching goals that look at overall sales of genuine products such as brakes, filters, service fluids, spark plugs and other hard parts.
While the price of an independent brand may be lower than a genuine oil, the combined benefits enjoyed by a dealer reaching its OEM program goals could be much greater. As an example, where a distributor might save a dealer 5 percent on the price of the motor oil, the credits accrued by using genuine products could yield significantly higher cost benefits across all parts (e.g. chemicals, oil, tires, hard parts). According to both lubricant marketers and new-car dealers, its complicated and difficult for a dealer to directly compare the cost of genuine oil against that of alternatives.
In addition to every penny counting toward meeting the program goals, some dealers express concern about the potential for negative consequences if they dont participate in a program. In addition, many tend to think that using a genuine oil brings lower risk and that they will receive more cooperation from the OEM with warranty claims, should problems arise.
For these reasons and others, new-car dealers demand for genuine oil has grown considerably over the past two decades and now represents 60 to 90 percent of the motor oil used by most dealers in the U.S. The primary and notable exceptions are dealers that are part of large buying groups like Penske, Victory Automotive Group and others that negotiate direct deals with majors for their brands.
But for those in the business, particularly marketers that have been locked out, the fact that genuine oils have captured a majority stake at new-car dealers is not news. What could be new and concerning news for others, however, is the implications that genuine oils can have for an oil majors lubricant distributors.
A marketers decision to align with a given major takes into account many factors, one of which is national account business. Aligning with ExxonMobil, for example, brings in Toyota and GM genuine oil; Phillips 66 brings in Ford Motorcraft and Honda; and Shell has Mercedes, Chryslers Mopar and BMW. BP Castrol has Volkswagen/Audi, Mazda and Volvo, while Idemitsu has Subaru. The volume available to a marketer through such relationships is often considerable, and in some cases represents more than half of the marketers sales volume. Although this is clearly a benefit to aligning with a given major, it can be a double-edged sword when an OEM makes a switch to another major.
While this is always a risk, the stakes are getting higher with consolidation and alignment. Adding to the risk and uncertainty, and a growing concern among marketers, is the suggestion of a scenario in which a major is throttling back on its OEM business and sitting on the sidelines waiting and watching alignment play out. As it does, its looking for the right opportunity to get back into the game and disrupt the channels by aggressively pursuing OEM genuine oil business. If successful, it would significantly strengthen its market position and render a significant blow to the competition and its channel partners.
With that in mind as well as the benefits of national account business and other factors in the alignment decision, many lubricant distributors are also thinking harder about their reliance on buybacks and their resiliency (and that of the majors they align with) to changes in national account business relationships.
Tom Glenn is president of the consulting firm Petroleum Trends International, the Petroleum Quality Institute of America, and Jobbers World newsletter. Phone: (732) 494-0405. Email: tom_glenn@petroleumtrends.com