Can Shell Unravel Texaco’s Network?


When Shell Oil bought out Texacos share of Equilon Enterprises LLC in January, it set off a battle for the lubricants distribution network that the oil companies shared for three years. Even before the sale – required by the U.S. Federal Trade Commission as a condition of its approval of the Chevron-Texaco merger – Shell and ChevronTexaco began competing for the allegiance of distributors who could deliver their products, not to mention the accounts they serve.

Like blue-chip football recruits, distributors were courted with financial incentives and promises of successful futures. The campaigns appear to be winding down, but it is difficult, unless one accepts Shells claims, to discern the winner. What is clear is that the competition has been spirited – and that the businesses of hundreds of distributors have been caught up in it.

Several distributors described the decision as a choice between the strength of Texacos brand names – which, in the long-term, will remain with ChevronTexaco – and the reliability of Shells formulas. As part of its purchase of Texacos stake in Equilon, Shell acquired rights to all existing formulas for Texaco and Shell products.

Shell had a nice program, but we decided to go with the heritage of Havoline and other Texaco brands, said Tony Yocum, president of Yocum Oil Co., St. Paul, Minn. Before the buyout, Yocum carried both brands but sold much higher volumes of Texaco products. Shell just doesnt have much of a presence in this part of the country. Its kind of a hole for them.

Randy Thomas, president and chief executive officer of Seattle-based Seaport Petroleum, saw a similar choice but opted for Shell. His company also carried both products before the buyout.

If you sell based on brand name recognition, a lot of people are going with ChevronTexaco, Thomas said. To us, the formulas are more important. With Shell, we were able to assure our Texaco and Shell customers that we would continue providing them the same products, even if the name changed. That continuity is what theyre looking for, especially our industrial customers.

Several distributors said Shell became a more attractive supplier after March 25, when it announced plans to buy Pennzoil-Quaker State Co. If approved, the acquisition would give Shell the two top-selling U.S. motor oil brands. Many distributors, however, decided which company to hitch their business to before the deal was announced, with the prospect that Shell might not have a strong passenger car motor oil in the long term. (The buyout gave Shell non-exclusive rights to market Havoline products until mid-2003.)

We dont know any of the details yet, like who is going to be able to carry those brands and how theyre going to fold them into their business, said Chip Bondurant, service manager of Mt. Airy Oil Co. The Mt. Airy, N.C., distributorship still carries both brands, although it has converted some Texaco customers. Obviously, though, those are big brands. [They] really change the face of Shells business.

Equilons network included 750 distributors before the buyout, according to Shell officials. Some carried both Shell and Texaco products, others just one of the two. Certainly there were some distributors not prized by one or both companies. However, it is also clear that many were targeted by both.

During a meeting with distributors in New Orleans last month, Shell claimed that it was winning the battle for Equilon. Officials said the company has retained the vast majority of Shell accounts and has seen growth in some areas since it took over Equilon. As of mid-February, U.S. distributor sales of Shell-branded automotive and industrial lubes were up 20 percent and 6 percent, respectively. Coolant sales were flat and commercial sales had dropped just 1 percent since the buyout.

At the same time, Shell contends that it has been picking off a large portion of Texaco sales. Officials said that 52 percent ofEquilon’ssales of automotive products had been converted to Shell products. Conversion rates for commercial and industrial lubes and coolants were 57 percent, 81 percent and 67 percent, respectively.

ChevronTexaco did not respond to requests for information about its campaign.

Both companies were lobbying hard. Distributors interviewed for this article said that both companies offered financial incentives. At the meeting in New Orleans, an audience of a few hundred heard ShellsJ.G. Jim Mortimer, manager of districts sales, describe a program that will pay bonuses on volumes converted from Texaco to Shell products and on sales growth from last years levels.

Were asking you to convert as many gallons as you can, to grow as fast as you can, and were going to pay you over and over and over again, Mortimer said.

But Shells pitch was not one-dimensional. A parade of officials told distributors that the company will offer improved customer service, more technical training, a comprehensive product slate and opportunities to help serve national and global accounts. The presentations laid out Shells strategy to displace ExxonMobil as the most profitable lubricant company in the United States. Several speakers tried to dispel any notion that the company would revert to its strategy of the 1980s, when it pulled back on U.S. lube operations and vacated some markets.

Some of you might expect us to return to the old Shell Oil Products days, Vice President of Sales and Marketing Larry G. Cekella said. But I can assure you that that is not the case.

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