Although there is much uncertainty about costs and prices, specifications and other issues in the lubricants business, there is one thing you can be sure of. As noted in last months column, lubricant marketers/distributors are consolidating, and this has and will continue to have a profound impact on the business.
With that said, its important to drill down into the numbers to see where we have been, where we are and where we may be heading. Well also examine what it could mean for both the majors and their marketers.
To understand and appreciate how the number of lubricant marketers has changed over the years, consider that there were roughly 10,000 lubricant marketers in the U.S. in the 1990s. At that time, most majors were doing direct business with 500 to 750 marketers. Although there were a handful of marketers selling close to 4 million gallons a year, the annual sales for most ranged from 500,000 to 1 million gallons.
Then the first wave of consolidation hit. Majors acquired and merged with other majors while rationalizing the number of marketers with which they did business. In the process, the number of marketers in the U.S. declined from roughly 10,000 in 1997 to 8,000 by 2002.
It didnt stop there. In fact, consolidation ramped up as the majors continued to skin down their number of marketers and looked to focus direct business with marketers aligned with the majors brands. As a result, by 2008 there were roughly 6,000 lubricant marketers on the U.S. map. And if you exclude the many hundreds of farm co-op locations, automotive parts warehouse distributors and other hybrid retail/wholesale operations selling lubricants, the number of dedicated lubricant marketers was only about 1,500 at that time.
Understandably, consolidation significantly increased the volume of lubricants marketers sold. As an example, whereas a large distributor sold 1 million to 4 million gallons of lubricants a year in 1999, in 2008 they were moving close to 10 million gallons per year, and there was one distributor with sales topping 30 million gallons. Over the same time period, medium-sized distributors scaled up from handling 500,000 to 1 million gallons a year to moving as much as 4 million gallons.
In addition to the majors continuing to encourage marketers to consolidate, there was another agent of change impacting the business. This came in the form of private equity, publicly held money and other investors looking to take home the gold by rolling up marketers and ultimately selling the combined entities to strategic buyers or other investors, or pursuing an IPO.
With this and other factors, the number of marketers principally dedicated to lubricants who are doing direct business with majors in the U.S. has fallen to an estimated 750 companies in 2016, down from 1,500 in 2008. And the size of the marketers has grown even larger. To illustrate this point, consider that the volume of lubricant sold by a large marketer today has nearly doubled that of 2008, and some have swelled to 25 to 50 million gallons of lubricants annually.
Thats the past and present; so what about the future?
In short, the answer is that the number of marketers in the lubricants business will continue to decline, and the average volume sold by those that remain will continue to increase.
To quantify how this population might change, consider a projection-based continuation of the trajectory of marketer consolidation occurring since 2004. By extrapolation, its reasonable to say that some of the majors will be doing direct business with 50 to 100 marketers by 2020, if not sooner. Further, at the rate one of the leading majors is currently shedding marketers, it could be doing business with as few as 25 to 30 marketers in the next five years.
At the same time, its important to consider that there is a floor to the number of marketers with which a major can reasonably expect to do direct business. This floor is set by geography, risk management, customer wants and needs, and other issues. In the eyes of some, the floor for the most aggressive majors in the U.S. seeking consolidation and alignment is 25 to 50 marketers. Thats a big drop from the 500 to 750 they used to do direct business with in the 1990s.
At the same time, while the number of marketers declines, the volume sold by those that remain in the game is expected to continue to climb. In fact, its not hard to find both majors and marketers that say a handful of marketers could be moving 50 million to 75 million gallons of lubricants a year by 2020, and one or two marketers could be selling just south of 100 million gallons.
Thats a lot of juice, and with it there will likely be a lot of changes and challenges for majors and marketers. The greatest challenge could prove to be the ability of both the majors and marketers to adjust to and maintain equilibrium of a mutually beneficial relationship in a world in which both have considerable clout.
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