Its all too common now to hear people in our industry (particularly consultants) say the lubricants business in the United States is flat to declining. What typically follows are slides, bar charts, data, hand waving, commentary and other support material to show that the volume of lubricant sold today is nearly equal to, or by some metrics less than what was sold in the past.
And in most cases they are right. When you look at sales in terms of volume over the past few years, its clear that growth has been relatively lackluster in some segments of the business. But is this the best way to speak about sales? Does volume tell the whole story about the health of the lubricants business and paint a fair picture about where the business is today and where its going tomorrow?
The answer is no. Furthermore, sales volume can be misleading and even mask important trends and business opportunities.
One example of this is passenger car motor oil (PCMO). Measured by volume, there is little doubt that sales of PCMO in the United States have been soft over the past five years. In 1999, PCMO sales reached nearly 750 million gallons; today theyre just over 800 million gallons. This represents a compound average annual increase in demand of only 1.2 percent.
Although technically not flat, its certainly not what one would call significant growth. In fact, if you factor in the level of uncertainly around the methodology used to collect much of the demand data being shopped in our industry, you will find that 1.2 percent growth is within the data purveyors margins of error. So technically, it is fair to say that PCMO sales are flat (and maybe even declining) when measured by volume.
An even less-attractive picture can be painted if one elects to focus on PCMO sales volume in the Do-It-Yourself segment. This is because there has been a marked shift in sales volume from DIY to Do-It-For-Me over the last decade. Whereas in 1994 nearly 400 million gallons, or 60 percent of PCMO sales went to DIYers, today that number is close to 330 million gallons – or just 40 percent of the total. This means that sales in the DIY segment have declined at a compound average annual rate of close to 2 percent over the last 10 years. It also means that if volume is the only measure one uses to assess the health of the DIY class of trade, there can be only one conclusion: The DIY segment of the lubricants business is sick and getting sicker.
But before marketers reach such a conclusion and pack up their bags to head to the more fertile grounds of DIFM, they might be well served to peel a few more layers off the onion and look beyond volume alone. When they do, they will find that although the volume of PCMO sold in the DIY segment has been declining over the last decade, the value of sales here has done just the opposite.
Whereas the PCMO sold to DIYers in the United States was valued at roughly $1.6 billion in 1994, it reached an estimated $2.2 billion in 2004. In constant dollars, this represents an annual growth rate of close to 2.5 percent. Given the same margin of error for both data points, this suggests that the loss in volume in the DIY segment of the business has been slightly offset by the segments increasing value. Although this increase loses some of its luster when one factors in the rising cost of goods sold over the period, value certainly tells a very different story about the segments health than does volume alone.
This should be no surprise to those who have elected to continue to slog it out in the flat to declining PCMO market. In fact, it may be the reason why some continue to invest in it. They know its not only about volume. Moreover, they know that the lubricants business is like other price-inelastic markets, and that growth can be enjoyed in these markets even when volume is in decline. The key is to shift focus from volume to value, and drive up the average price of the product with the understanding that, in an inelastic market, any lost volume due to price increases will typically be offset by increases in sales value.
And that is exactly whats been taking place with the DIY class of trade. The leading suppliers continue to add real and perceived value to PCMO – and consumers are proving they are willing to pay for it. Value is successfully supplanting volume.
The net result is that although from a volume perspective the DIY segment of the business is flat to declining, when measured by value its actually growing in the United States. But even this does not tell the full story. Although value adds another important dimension to the picture, it doesnt speak to who is enjoying the growth. That requires peeling another layer of the onion.