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Need to Know


Its clear that there are two very different, and emotionally charged, schools of thought in the fast-lube industry about the use of generic and second-tier lubricants. At one end of the spectrum are those fast-lube operators who embrace the practice, and at the other are those who say its the bane of the industry and could eventually lead to its downfall.

Since I certainly dont have a dog in this fight, I can conveniently avoid commenting on the merits of either argument. But as noted in last months column, the existence of these polarized and highly charged opinions may be symptomatic of something deeper going on. That issue is about the four-letter word cost.

Frequently, the first issue fast-lube operators will mention, when asked about the leading threats to their business, is rising costs. Although costs of labor, insurance, filters and other consumables certainly have increased over time, they say, lubricants contribute the greatest percentage of their cost of goods sold. And the price of lubricants just keeps going up.

To some, this seems a simple problem with a simple solution. Rather than complaining, they say, fast-lube operators should toughen up, pass the higher cost of lubricants on to the consumer and get on with the business of changing oil.

But it isnt that simple, counter others in the business. Although a fast lube operator may set the prices on its signs, sandwich boards and coupons, the competition sets the price in the marketplace.

For fast-lube marketers located off Interstate 15 somewhere in the desert between California and Nevada, or in Podunk, USA, this might not be an issue, and there may be no need for them to read on. By the grace of God and/or luck, they have little to no competition. As a result, those in geographic niches have the luxury of setting their price and the price in the marketplace.

But what about the fast lubes located in areas of high population densities, where at least one outlet can be found every few miles? Do these operators have any control over the market price, and can they simply raise their prices when the costs of lubricants go up? You can be sure they would if they felt they could.

So why arent they, whats stopping them?

For some, the answer is obvious: Its the low-price players in their market. Many fast-lube operators say they cant move prices above a ceiling in their markets because if they do, experience has shown they will lose business to lower-priced competitors. This is the law of the jungle in a competitive market, where they say consumers dont perceive a big difference in the products and services offered, and where price is highly visible.

In Game Theory, this is called noncooperative pricing. Also referred to as predatory pricing, it occurs when price leaders attempt to capture market share and/or drive the competition out of business by undercutting prices and compressing margins. In the minds of many in the fast-lube business, such price leaders include Wal-Mart, Jiffy Lube and a number of other large chains that price an oil change between $17.99 and $29.99. Others in their geographic orbit say they have little choice but to stay in line with these leaders prices – or be disciplined by losing market share.

The very nature of this competitive environment favors the low-cost – not low-price – players in the business. The market price is relatively level for all, at the ceiling set by the price leaders. But the low-cost players enjoy the highest margins. And if a fast-lube operation does not have the buying power of Wal-Mart or the other retail/fast-lube hybrids, nor their ability to transfer oil from the front of the store to the back and enjoy even lower costs by buying in through a different class of trade, then it is likely watching margins shrink every time lubricant prices rise.

When this happens some feel they can choose to do nothing and watch the business slip away over time, or sell the business and make it someones else problem – or take serious measures to reduce their costs. And when someone comes knocking on the door with a generic or second-tier brand at $2.00 or more a gallon below their current cost, it could be hard to say no. For them, it may no longer be about brand, loyalty or maybe even quality. Instead, its about managing costs and dealing with one other underlying issue in the fast-lube business. That issue is that its an overcrowded market in many regions.

So maybe the reason for the polarized views about generics goes even deeper than cost. Maybe its rooted in the fundamental differences in the competitive strategies required to compete in an overcrowded and increasingly competitive market.

Some will elect to compete on price and others on product differentiation, and there really is no right or wrong answer because consumers demand both. There will be winners and losers on both sides of the private-label and brand-name fence. But rather than by what brands they carry, or what the competition thinks about the brands they carry, the real winners and losers will be determined by how well they manage their businesses.

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