Who’s Fooling Whom?
With national accounts growing, it’s always interesting to speak with marketers about buyback fees. In basic terms, buybacks in the lubricants business refer to an agreement in which a major buys product back from the marketer’s inventory and pays the marketer a fee to deliver it to a national account. (See my March 2019 column for more on national accounts.) Although conceptually a simple model, for years such arrangements have been contentious and sometimes querulous. And the level of concern is increasing.
Although marketers generally value the additional volume that comes from buyback business, many feel the buyback fees do not accurately represent the marketer’s cost to serve national accounts. Instead, the fees are based on the price it costs a major to land the national account business.
While this would be rational and reasonable if the marketer had some input on the delivery costs prior to a major tendering a bid for a national account, many marketers say it doesn’t happen that way. Instead, they are often presented with a take-it-or-leave-it buyback fee once the account has been awarded.
Marketers are commonly told that the buyback fees are based on benchmarking studies, market conditions and other variables. As such, they account for changes in the costs of fuel, labor and other inputs. But an increasing number of marketers question the underpinnings of the fees and their responsiveness to changing market conditions.
To understand the doubt and reason for concern, it’s instructive to look at buyback fees over the past 15 years.
A benchmarking study conducted by Petroleum Trends in 2005 shows buyback fees ranged from $0.40 to $1.00 a gallon, with an average of $0.58. ExxonMobil offered the highest fees with a range of about $0.75 to $1.00 a gallon, and Shell was at the lower end, averaging just under $0.55 a gallon.
The range in fees that existed for nearly all majors was a function of product type, where the highest fees were tied to premium products—primarily synthetics—and the lowest to conventional oils. At the time, Chevron had the widest range with a low in the area of $0.50 and a high close to $0.75 a gallon. In addition to fees footed in product type, some majors also made fee adjustments based on the level of service required by its national accounts.
The 2005 numbers get interesting when they are converted to equivalent dollars for 2020. Adjusting the 2005 fees for inflation, the average buyback in 2020 would range from $0.53 to $1.32, with an average of $0.77 a gallon. According to Petroleum Trends’ recent survey of marketers, the actual buyback fees this year are currently in the range of $0.70 to $0.90 a gallon, with an average near $0.75. This means fees have barely kept up with the 32 percent cumulative inflation rate over the past 15 years.
Considering that the producer price index for fuel and lubricants retailing increased by close to 40 percent over the past 10 years, marketers appear to have a point when they say buyback fees are not responsive to changing market conditions and do not reflect the actual cost to serve.
Further, marketers express consternation that where national account contracts often afford suppliers an opportunity to adjust prices every three to six months based on changes in selected crude oil indices, there is little to no consideration given to preserving a marketer’s margins when its costs to serve national accounts increase.
Although an argument could be made that crude oil and base oil prices, and therefore finished lube costs, are subject to greater volatility than the cost inputs required to serve national accounts, marketers generally remain unconvinced the fees are rational and responsive to changing market conditions.
While such doubt has existed for years, marketers are getting smarter. Today, they are looking more closely than ever at costs to serve national accounts. They understand that buyback fees are not simply the cost to deliver a gallon of oil on a truck and that the cost to manage those gallons must be taken into account.
Many marketers now have technology that enables them to analyze and scrutinize the cost to serve with a high level of precision. Such analysis takes into account changes in fuel prices, driver compensation, equipment, maintenance, insurance, bulk tanks, warehousing, utilities and other fixed and variable costs.
In addition, some marketers’ buyback business has grown to a point where at least one full-time employee is required to handle the accounting and servicing of national account business. These costs, too, are being allocated accordingly.
Adding to this, marketers understand and are increasingly sensitive to the impact national account business has on the pooled margins across all their product sales. The greater the percentage of buyback business, the more margin the distributor needs to make per gallon on its sales.
Interestingly, however, when marketers push back on the fees and put real numbers on the table to show their true costs to serve, they say they are often led to believe they are alone and that other marketers have no issue with the fees. While many doubt this is true, they say that if it is, it’s probably because those marketers don’t know what their true cost to serve is. In the process, marketers take what they are given and fool themselves into believing it’s good business. But is it? z
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