Last January, I offered up some thoughts in this column about what the upcoming year might look like for lubricant distributors. The forecast included further consolidation of lubricant distributors, creating giants in the industry. It also predicted that the API CK-4 heavy-duty diesel engine oil category would roll out relatively quickly into the market, while adoption of its fuel economy counterpart, FA-4, would be slow.
Other predictions spoke to continuing erosion of overall lubricant demand in the United States, SKU proliferation, increasing cost to serve, compressed margins, graying of the workforce, and hiring and retention of qualified truck drivers, among others.
So, how did the forecast shake out? More importantly, what can the lubricants industry learn from last year and expect to see in 2018?
For the most part, the predictions made at the beginning of the year played out, and some, including SKU proliferation, the cost to serve, compressed margins and transportation, had a significant impact on the cost and price of lubricants. In part, these factors helped drive three rounds of lubricant price increases in 2017; all told, prices rose by close to 18 percent. It should be noted, however, that some of the increases were less sticky than others, particularly the third, in mid-November. But even with that, most distributors were able to maintain reasonable margins.
Although API CK-4 made significant progress penetrating the market, it took more effort by distributors to educate trucking firms about the change. In addition, transitioning to CK-4 inventory presented a higher level of supply chain challenges than many anticipated. As expected, FA-4 demand was tepid.
The graying of the workforce remained a significant issue in 2017 and is expected to continue. One effect was senior leadership changes, as seen at two of the leading lubricant additive manufacturers (Lubrizol and Chevron Oronite) and several large lubricant manufacturers and distributors.
But one of the biggest events in 2017 was the continuing consolidation of lubricant distributors and the resulting growth in their size and geographic footprints.
PetroChoice was the first to support this projection when it acquired Miller Industrial Fluids in January. With this acquisition, PetroChoice grew to 51 locations servicing 32 states, and gained a presence in Indiana, bridging its existing Ohio and Illinois locations.
RelaDyne worked fast to complete a number of big deals, too. The first was the acquisition of Sensmeier Oil in early February. This enhanced RelaDynes already large footprint to better serve northeastern Ohio and businesses in Toledo and Cleveland. As the ink dried on that deal, RelaDyne announced the purchase of Hager Oil Co., in April. This transaction solidified the distributors presence in Alabama and widened its geographic coverage to 50 locations in 18 states.
If that wasnt enough, in late May RelaDyne completed the largest transaction in company history when it acquired Western Marketing Inc., a leading regional lubricant distributor in Texas. This move significantly expanded RelaDynes geographical reach and market share in the Southern U.S.
And to erase any doubt that 2017 would be marked by acquisitions, Pugh Lubricants (part of Tenex Capital Management) combined forces in March with Apollo Oil to create one of the largest lubricant distribution companies in the Eastern U.S. ThedeallinkedPughs service regions inNorth Carolina, South Carolina, Virginia and Tennessee with Apollos in Kentucky, Ohio and West Virginia. Just six months later, Pugh-Apollo acquired Birmingham, Alabama-based Veterans Oil, and expanded its reach into Alabama and Georgia.
Other notable acquisitions among distributors included Tennessee-based Parman Energy acquiring Star Petroleum in Arkansas, and Utah-headquartered Rhinehart Oil acquiring Rex Oil in Colorado.
Of course, some significant events that impacted lubricant distributors in 2017 could not have been predicted. Shell announced in late December 2016 that its gas-to-liquids base oil plant in Ras Laffan, Qatar, was limping along at half-capacity due to unforeseen maintenance issues.This led to a protracted supply disruption that resulted in Shell enacting an allocation for synthetic lubricants that it markets as containing PurePlus brand base oil. The affected products included Pennzoil Gold synthetic-blend passenger car motor oil, Shell Rotella T5 SAE 10W-30 and 15W-40 heavy-duty engine oils, and its flagship Rotella T6 SAE 5W-40 HDEO. As a result, Shell distributors had to scramble for a good part of 2017 to meet the needs of customers and defend their business from hungry competitors looking to feast on the supply interruptions.
Another significant, unforeseen event was the action taken by the state of Missouri late in 2017 to ban the sale of long-obsolete John Deere 303 tractor hydraulic fluids. Although its impact was limited to the state, it sent a clear message to lubricant manufacturers and distributors that the arms of the law are long and now reach deeper into the lubricants business. For some, this was a wakeup call to revisit outdated specifications and language on the products in their portfolios.
These are just some of the issues lubricant distributors had to deal with in 2017, but whats on their minds now that we are at the starting line for 2018?
Many expect more of the same, with two big differences: the scale of changes, and the increasingly high stakes tied to decisions around them. At the top of the list, many lubricant distributors point to acquisitions and exit strategies; selecting and strengthening supply relationships; capitalizing on resources shared with suppliers; finding additional revenue from supplemental sales; balancing buyback business; private-label business; cost reductions; rationalizing sales forces to gain and retain top producers; and e-commerce.
These issues will be the subject of next months column.
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. Email: tom_glenn@petroleumtrends.com