Marketers are an integral part of the lubricants value chain. They provide the feet on the street to sell and service lubricant accounts, and they operate the trucks that deliver the products. To underscore their importance, consider that marketers touch close to 80 percent of the lubricants consumed in the United States. If they all shut their doors for a week or two, it would likely be considered a national emergency garnering front-page news.
But fact is, they do their job and do it well, and for the most part without much noise about the growing pains they have endured as the industry moves through the mature stage of its life cycle.
No precise moment exists when an industry moves from one life-cycle stage to the next, but the U.S. lubricants industry started transitioning into the mature stage in the early 1980s. Although there have been spurts of growth since that time, U.S. demand for lubricants started to decelerate in the 80s and over this past decade has struggled to post more than one or two percent annual growth.
In addition to softening demand, the past few decades revealed other hallmarks of maturity. For example, lubricant performance specifications became tighter. Once that happened, it became increasingly difficult to differentiate products based on performance. As a result, marketers were driven to compete more heavily on price, and that in turn spurred growth in private-label sales.
The move to maturity was also marked by consolidation. Merger and acquisition activity in the 1990s and into the start of the new millennium significantly thinned the ranks of oil majors and marketers alike. Cost reduction was paramount, and the majors who survived had to rationalize the number of marketers they did business with.
The first wave of marketer consolidation was, many agree, an ugly period. This is when majors cut ties with many small marketers by not renewing supply contracts. This was followed shortly after by majors using both carrots and sticks to prod medium- and large-size marketers to align with their brands. And while this was going on, the economy was stuck in the doldrums, margins were being compressed, national-account business was growing, private label was pulling sales from the majors, rivalry among competitors intensified, and other changes were under way.
Needless to say, these were trying times for many marketers. Some closed their doors and others had to sell. And those who remained found themselves in a high-stakes race to build scale, minimize cost, optimize logistics and strengthen supplier relations. They had to carefully pick their brand partners (align), strengthen their management teams and organizational structures, and make and integrate their own strategic acquisitions.
Even as marketers continue to address these and other issues, there are hints of even more changing and challenging times ahead. One example is the massive supply of base oils set to enter the market over the next few years. Many marketers expect this overhang will destabilize prices, crush margins, rattle supplier relations, and drive some stakeholders clean out of the business. In addition, it could inhibit the growth of private-label lubricants.
Also in the air is the rumble of supplier contract renewals. Contracts often run three years, so over the next 36 months many majors and marketers must renew their relationships or part ways. This contract cycle could shake things up by further increasing pressure to align – and drive more marketers out of the business.
Growth in national-account business, where sales migrate from the marketers paper to the majors, is also seen as an increasing concern moving forward. Marketers say rising numbers of direct-served customers are graduating to national-account status by purchasing through buying groups, cooperatives, associations and other consolidators. While marketers value such customers, the value of the marketers own businesses can suffer as national-account activity increases. And for a growing number of marketers, national accounts are reaching 50 percent or more of their delivered volumes.
Technology is another change agent that continues to reshape how marketers conduct their business. As an example, few kick tanks anymore to gauge volume – tank monitors do the job 24/7. And thats only a baby step. Technology is setting the pace for best-in-class performance in order processing, reporting, customer relationship management, external communication, quality management, engineering services, recycling, filtration, oil analysis and other areas. Marketers are well aware that such technology comes at a price they have to pay if they want to continue to play.
The one change that marketers have the least control over, though, could prove the most challenging. That is the flat-to-declining volume demand they will see as the market moves from maturity to the early part of the next stage in the industry life cycle: decline.
Signs of decline can be discerned already in the notable and irreversible erosion in demand that is due to synthetic lubricants and other advances that have enabled longer drain intervals. Although the lost revenue can be recovered in part by the higher price of synthetics, its clear that more needs to be done if marketers are to remain healthy. z
Next month: How majors and marketers are collaborating in an effort to prepare for and adapt to an industry in transition.
Tom Glenn is president of the consulting firm Petroleum Trends International, the Petroleum Quality Institute of America, and Jobbers World newsletter. Phone: (732) 494-0405. E-mail: tom_glenn@petroleumtrends.com