Creating Oil for Car Guys.

Company researchers discovered that Real Car Guys not only care about their cars, they also care about the environment. This discovery forms a large part of Valvolines current marketing and business strategy, particularly in developing NextGen rerefined motor oils and in adopting an extensive sustainability effort at its facilities.

LubesnGreases recently visited Valvoline sites in Lexington, Ky., and Cincinnati, to learn more about these initiatives and the companys plans for the future.

Valvoline was founded in 1866, so theres a lot of history behind the brand, pointed out Ashland Senior Vice President Samuel J. Mitchell Jr., who helms the business. When people hear Valvoline, they immediately think quality, and that spirit of quality has helped us grow.

Valvoline today is a brand of Ashland Consumer Markets, a commercial unit of Ashland Inc., which acquired the nationally known lubricant brand in 1951. Reaching nearly $2 billion in sales in 2011, the unit has grown in importance to Ashland because of the corporations restructuring from a regional oil and refining company to a specialty chemical company, said Mitchell. In its fiscal 2011, Ashland derived 21 percent of its pretax earnings from Consumer Markets, which consists principally of Valvoline lubricants and its quick-lube outlets.

We return consistent profit margin and growth. Lubricants are our most important product line, Mitchell went on. We are known mostly for our passenger car motor oils, especially in the U.S. But we also offer a wide range of commercial and industrial products. He sees a lot of growth opportunities in the latter market segments, particularly overseas. Thats where product technology can be an important differentiator.

We have a history of innovation at Valvoline, said Thom Smith, vice president of branded lubricant technology. Smith, who is responsible for developing and marketing passenger car motor oils, enumerated a number of Valvoline firsts, including the first passenger car motor oil, the first motor oil trademark, the first synthetic blends, and the first high-mileage oil, MaxLife.

The thing that differentiates us is how closely we work with our customers and our channels to market, Mitchell said. Our partnerships with distributors, franchisees and major national accounts have been very important to growing our business.

Growth is key, because Mitchell and his team face a very daunting hurdle, a steep earnings target. In fiscal 2011, Consumer Markets contributed $251 million to Ashlands earnings before taxes. And although North American market conditions are considered soft and Do-It-Yourself lubricant volumes have slipped, Ashland has set the pretax earnings bar for this business at $420 million in 2014.

International Presence

International markets account for nearly 30 percent of Valvolines revenue. We have strong positions in Australia and India, and a growing presence in China. Weve been in Western Europe for a long time, and there are now opportunities in Central and Eastern Europe and Russia. We expect our strongest growth to come from these markets, said Mitchell.

We have a strong global marketing partnership with the Cummins Engine Co. to supply specialty oils for their engines, said Smith. That endorsement provides an opportunity for very profitable growth overseas. In addition to India, the company also has joint ventures with Cummins in China and Argentina.

Valvoline has developed strong relationships with other major OEMs as well, such as Mahindra & Mahindra Ltd. in India. These relationships are based on understanding where theyre taking engine technology, and working with them in the aftermarket on how to service equipment after its sold, said Mitchell.

To bolster its presence in Russia, the company signed an agreement with TNK-BP to distribute Valvoline passenger car motor oils, transmission oils, brake fluids, car and engine care products and coolants. Russia is the biggest passenger car lubricants market in Europe, and it represents a significant opportunity for motor oils, particularly with the increasing popularity of Western cars, Mitchell said. Through this partnership, Valvoline products will have access to 15,000 retail outlets across the country.

Russia is a great market for us, said Blair Boggs, vice president of global brands. They have a large population of Western cars, and theyre looking for top-brand oil products. And our research shows that a growing number of Russian consumers wont put Russian oil in a Western car.

Blending Quality

Valvolines blend plant along the Ohio River west of Cincinnati opened in 1966 and has received major upgrades in the past 12 years, said Plant Manager Patrick Nelson. The company installed a new blend system and tank farms, and it commissioned a new production line in January 2012. The plant occupies a 13-acre site and employs 100 people.

The Cincinnati plant blends, packages and ships engine oil, transmission fluid, gear oil and hydraulic fluid in a variety of packages, from 12-ounce bottles to bulk quantities. The products are shipped to its distribution center north of Cincinnati, and from there out to Valvolines customers.

Cincinnati is the largest Valvoline facility in the world, said Nelson. We blend and package 40 percent of the total volume for North America. Blend tanks at Cincinnati range in size from 7,000 to 100,000 gallons, and the plant produces 450 SKUs in 110 different formulations.

The plant is also equipped with a quality assurance lab staffed 24 hours a day. The lab tests incoming base oils and additives, and every blend batch. Even the containers are checked to ensure that labels and caps are installed properly, said Nelson.

Other North American blend and packaging plants are located in Houston, Pittsburgh and Los Angeles. This regionalized approach allows us to service customers quickly, said Nelson. Overseas, plants are in Dordrecht, Netherlands, and Sydney, Australia.

Trailblazer: NextGen

Much discussion centered on Valvolines NextGen product line, which uses a 50/50 blend of rerefined and virgin base oil. NextGen was developed as part of the companys sustainability initiative, and has created another new engine oil category, said Smith. Were always looking for ways to have a more sustainable business, and saw rerefining as an opportunity to introduce an innovative product while helping the environment.

Although other brands for years have sold engine oils with some recycled content, NextGens debut in early 2010 marked the first nationwide roll-out of a 50 percent recycled blend by a major brand.

Until recently, Smith said, the technology, quality and consumer acceptance of rerefined oils were limited. But Valvoline saw that the technology for rerefining oil had vastly improved. In particular, techniques such as hydrotreating helped boost quality. That alone was not enough; it also took that we had a higher-quality used oil feedstock, said Smith, adding that the growing use of API Group II and III base oils has raised the quality of used oil available as a feedstock for rerefiners. We arrived at a point where we could make an oil that we felt comfortable putting the Valvoline name on, Smith concluded.

Valvolines market research also indicated consumer attitudes had changed sharply in the last decade. For a long time, consumers had the idea that with rerefining youre just getting used oil, and the quality wasnt there, said Boggs. But extensive recycling in other industries made consumers more open to recycled engine oil. Once we had all three pieces together – technology, quality and consumer acceptance – we were able to develop the formulations and the marketing strategy to take it to the marketplace, said Smith.

We meet all the same industry specifications, use the same additives and run the same tests as with our conventional oils, Smith said. Whats more, the company recently announced that NextGen MaxLife SAE 5W-30 motor oil meets General Motors Dexos1 specification, as does regular MaxLife.

We see NextGen following a good growth trajectory over the next several years, said Smith. He added that the company has noted a 99 percent return rate among drivers whove used it. Some consumers, added Boggs, are more accepting of NextGen because they see it being used in NASCAR, Nationwide and NHRA racing cars. We believe recycled oil is good for the industry, and we see it as a new conduit for customer loyalty, said Boggs.

Valvoline has also begun a program to encourage recycling. Only 25 to 30 percent of oil purchased in retail parts stores comes back to the store, noted Boggs. To capture more of that oil and help build return business, Valvolines Close the Loop program offers an incentive for do-it-yourselfers to recycle their oil and buy NextGen. AutoZone, OReilly, Pep Boys and Advance Auto Parts customers who return their used oil and buy five quarts of NextGen can receive a $20 store gift card.

It brings customers back and improves loyalty, said Boggs. The company reports that since its introduction, over 1 million customers have used NextGen; its sales are tracking those of MaxLife, which originated the high-mileage engine oil category.

A Sustainable Future

Sustainability is an Ashland initiative and is especially strong in Valvoline, said Mitchell. The idea of reducing our environmental footprint has been a bottom up effort from the Valvoline team.

A group of us within Ashland formed a sustainability committee and started working on it, said Fran Lockwood, senior vice president, R&D. It goes along with our overarching attempts to always do things better – to have better processes.

Valvoline periodically issues a sustainability scorecard, and one of the key metrics is the percentage of its products that have some aspect of improved sustainability. Lockwood noted that the figure is very high, though she declined to be specific.

Our technology team has been a key part of this effort, she said, exploring ways to reduce the environmental impact of our products. NextGen is the most public sign of this commitment.

Sustainability efforts are in evidence at Valvoline facilities such as the Cincinnati blend plant. Recycling stations throughout the building collect paper, cans, cardboard, plastic bottles, stretch film and foam cups. We recently added high-efficiency lighting both in the warehouse and production building, and replaced air compressors with high-efficiency models, said Patrick Nelson. Large ceiling fans in the warehouse move heated air evenly throughout the plant during the winter to reduce utility costs. We will soon add these fans to our production building.

A couple of Valvoline facilities are zero landfill, Nelson added. We are pushing hard to get to that level, and in the first quarter of 2012 alone, we reduced our landfill contribution by 65 percent.

Committed to Fast Lubes

Besides the retail channel, Valvoline has a big presence in the quick-lube market. It has a network of about 870 Valvoline Instant Oil Change outlets, 260 of which are company owned. We have a vested interest with our franchisees where we learn the best processes and the best technologies and pass them on, said Mitchell. Our retail stores have improved same-store sales performance six years in a row. Thats in contrast to the rest of the industry, where research shows most quick lubes lost significant car count over the past five years, he added.

According to data released by Ashland in June, same store sales at VIOC outlets open for two years or longer averaged $13.1 million in the 12 months ended December 2008, and hit $13.9 million a year later. At the end of 2011, it had climbed to $15.5 million.

Boggs noted that at Valvoline Instant Oil Change stores, about 70 percent of consumers choose NextGen. It is becoming so successful that we are moving to bulk packaging to save on the use of plastic bottles in our oil change outlets.

We love the quick-lube business. It has a lot of opportunities for growth, said Mitchell. In fact, earlier this year, Valvolines largest quick-lube franchisee, Henley Enterprises, acquired 72 E-Z Lube stores in Southern California. It shows you the success theyve had in following the Valvoline approach on how to run the business.

Challenges Ahead

One of the biggest challenges faced by Valvoline – as well as its lubricant competitors – is emerging OEM specifications, Smith said. General Motors Dexos1 specification for example, differs significantly from industry specifications, requiring a whole new approach.

This has been a long-term issue in Europe, Smith explained, noting that a single oil covers all North American and Asian gasoline-fueled vehicle requirements. In Europe however, an oil marketer must field seven different oil formulations to meet the various OEM requirements. Ford, VW and Mercedes are among the OEMs there who maintain proprietary oil specifications.

This really creates a challenge for installers and retailers to keep the different products stocked and separated so the right oil gets in the right vehicle, Smith said. The different specifications can have the effect of stifling innovation, he added, because when we spend all our time trying to meet OEM specifications, it limits the resources available to develop something truly unique.

In North America, in contrast, differentiation is based on consumer desires. For example, developing the MaxLife line had nothing to do with OEMs, but everything to do with consumers, said Smith. Its the same with NextGen.

Valvoline also remains critical of GMs system for licensing its trademarked Dexos1 engine oil, with fees based on market share. In effect, it feels, the automaker wants to collect a royalty for every gallon of oil used in a GM vehicle. We dont see how this requirement provides value to The Car Guy, Smith stated.

Another near-term challenge is the development of products to meet ILSAC GF-6, the engine oil category upgrade which is scheduled for introduction in 2015. A number of new tests are being developed as replacements for existing tests, and we dont have a lot of time to determine their appetite, cautioned Fran Lockwood.

GF-6 is rife with sticky issues. For example, the ASTM Sequence IIIG test for engine wear and oil thickening must be replaced; however, General Motors, which supplies the test engine, does not want the test to be an ASTM method. We have real concerns over how that test will be monitored and supported, and how it would fall into the ACC Code of Practice, Lockwood said.

There are concerns over timing for other replacement tests, too, she said, but they are following the traditional approval process and will be ASTM qualified tests. Were comfortable that they will be properly monitored and referenced.