Jiffy Lubes Largest Franchisee Bankrupt


Heartland Automotive Holdings, the largest U.S. Jiffy Lube franchisee, and its affiliates on Jan. 7 filed for Chapter 11 bankruptcy reorganization. The company claimed it was brought about by a breakdown in negotiations with Jiffy Lube International to resolve long-simmering disputes and by a decline in financial performance attributed to rising gasoline and oil costs that reduced customer visits and squeezed margins in 2007.

Heartland Automotive Holdings is not related to or affiliated with Heartland Petroleum, which is opening a rerefinery in Ohio.

Heartland Automotive has 438 stores in 20 states, employing more than 4,000 people. In the Chapter 11 filing, the company said that as of Nov. 29, 2007, its books and records on a consolidated basis showed assets totaling $334 million and liabilities totaling $396 million. The filings list of creditors with the 20 largest unsecured claims includes ConocoPhillips, SOPUS Products, Emerald Petroleum, Mobil Oil Corp., Interstate Petroleum Inc., United Oil, and the Jiffy Lube Association of Franchisees.

In an announcement on Monday, Heartland said it has made arrangements with key vendors to keep product flowing to all store locations. Interim first day orders from the bankruptcy court will permit the company to use cash on hand to fund operations and pay ongoing employee wages and benefits.

The company outlined the disputes with Jiffy Lube International as including how to most effectively spend advertising dollars to support the business, the appropriate methodology for rolling out a proposed re-image package at the stores, the level of support JLI should provide to the network, oil pricing for Pennzoil-Quaker State products from JLI parent Shell Oil Co., and the circumstances under which Heartland can continue to expand and grow its business. Efforts to resolve these matters have been on-going for nearly two years, but have produced little in the way of progress, Heartland said. Late in July 2007, JLI took the position that it could terminate agreements covering certain Heartland locations.

Heartland said that the possibility that Jiffy Lube would attempt to send additional termination notices, combined with the anticipated cost and delay from the litigation that would likely ensue, were significant drivers in the decision to file for Chapter 11.

Upon completion of the initial stabilization phase of its Chapter 11 case, Heartland said it anticipates returning to the negotiation table with Jiffy Lube International. If a satisfactory resolution cannot be achieved, the company anticipates seeking bankruptcy court authority to reject its franchise agreements with JLI and proceeding with a plan to exit Chapter 11 as a re-branded business, Heartland said in its announcement on Monday.

While we would prefer to find a solution that would permit us to continue as part of the Jiffy Lube network, we will not compromise the recoveries of our stakeholders and employees to do so, Heartlands Glover said. As such, we are prepared to separate from JLI by agreement or court order, if necessary.

A Jiffy Lube International spokeswoman said the company had no comment on the bankruptcy filing. It did release an official statement acknowledging Jiffy Lube had been informed about the Chapter 11 filing. Operations are expected to continue as is while Heartland goes through the bankruptcy process, the company said in the statement. Minimizing service interruption for our customers is the highest priority for Jiffy Lube International.

In its bankruptcy filing, Heartland blamed increased prices of oil and gasoline for its decline in revenue. High gasoline prices affect the number of miles a potential customer drives, which in turn directly impacts automotive maintenance spending, the company said in its bankruptcy filing. When customers drive less, their vehicles require fewer oil changes and other services, and the demand for the debtors services decreases.

Heartland Automotive is a member of the Dallas, Texas-based Automotive Oil Change Association, which represents the fast lube industry in North America. AOCA Executive Director Steve Christie said high gasoline and oil prices are impacting a lot of the associations members.

The U.S. consumers budget for their car is X amount of dollars per month, Christie explained to Lube Report. If you turn around, and say, Are you going to put money into another tank of gas to go to work, or are you going to change your oil?, guess what the answer is? Theyre going to put the gasoline in. Its not even a choice, its a necessity.

He said the impact seemed more noticeable when gas prices first started approaching the $2.50 per gallon to $3 per gallon range across the country. I think its still a problem, he added.

Christie said that with an emphasis on budget-minded consumers, Heartlands Jiffy Lube locations are also vulnerable to mass-merchant retailers such as Wal-Mart going after their oil change business customers. The budget minded consumer is going to find the best price they can find, he added.

Garrett McKinnon, editor of National Oil & Lube News, said he believes Heartlands problems stem largely from a May 2006 investigation by KNBC-TV in Los Angeles. The television station took test cars with hidden cameras to several L.A. area Jiffy Lubes, frequently reporting allegations of services charged-for but not performed.

It was a huge expos, McKinnon told Lube Report. I think it not only impacted Jiffy Lube nationwide, it specifically knocked Heartland for a loop and exposed some managerial issues. I think once it happened, Jiffy Lube International probably cracked the whip on them pretty hard.

In response to KNBCs story, according to an article at the stations Web site, Jiffy Lube International demanded Heartland Automotive transfer operation of the five stores featured in the story to another franchisee approved by JLI, that it revise its incentive compensation programs and that Heartland issue an apology to the JLI franchisee community. Heartland also instituted several changes, including ethics/media training for all its employees, a hotline for employees to report unethical behavior, and installation of video cameras and monitors in its greater L.A. stores so customers could view services performed on vehicles.

Nationally, according to KNBC, itsrevelations caused Jiffy Lube to implement system-wide operational changes, such as an undercover mystery shopping program, a store-audit group, and annual business-assurance reviews.

McKinnon said extended drain intervals for oil changes may also be a factor. Weve anecdotally seen that maybe drivers are extending their maintenance intervals just a little bit, he said. That could be a combination too ofautomakers extending intervals for several years. I think its a combination of factors. Certainly its a tough market out there.

He said there have been few instances of Jiffy Lube pulling a franchise license. They did so from a group in Denver a few years back, McKinnon said. Theyre really loathe to pull a franchise license.

In its March issue, NOLN will release its 2008 list of top U.S. fast lubes. Our preliminary figures are that Jiffy Lube will have closed some stores during the past year, he said.

Heartland Automotive Services was formed in 1995 when five independent Jiffy Lube franchisees in St. Louis, Minneapolis, Kansas City, Austin and Omaha joined forces, initially with 66 stores total.