Overcoming Online Disruptors


Overcoming Online Disruptors

A typical customer shopping on Amazon.com might have a thought process that goes something like this:

Lets see. Ive ordered my groceries. Ive added a download of Rihannas latest album. Say, why dont I add a quart of 5W-30 to my order? Whats this? It seems I can buy an AmazonBasics brand oil for a lot less than my normal brand. Well, lets try it.

This is now a reality for customers across the United States. In many other countries, Amazon offers a range of well-known motor oils, though not yet its own brand. And the range on offer extends to many industrial grades.

This poses a clear challenge for established brands, but its hardly the first. Big box retailers have been selling motor oils at competitive prices for more than a generation. If selling lubes was just about price in a race to the bottom, it would have been game-over long ago. But the real competition that decides the markets winners and losers is played out across the value chain, where the right price is just one of many keys to success.

Branded lubricant companies and their distributors should be asking themselves whether Amazons entry will succeed. But, more fundamentally, lubricant companies should be using the moment to look critically across their entire value chain-not just sales-both to stress-test their operations in the face of potential disruptive competitors and to check for potential opportunities. Lets be clear, Amazon is just one of many possible sources of disruption; other players in the value chain, from suppliers to equipment users, are now looking to take a slice of the market.

With its deep pockets, Amazon could attempt to play across the entire value chain-for industrial as well as automotive products; to businesses as well as consumers. Even if it turned out to be a spectacular failure, it could disrupt the business model of many a company that failed to react. It could crater margins in attractive sectors like consumer automotive. Why wouldnt the successful online retailer try to cherry-pick the low-hanging fruits of the market, such as simple home deliveries to consumers, retailers or even workshops?

So of course, the challenge is just as relevant to lubes distributors as to the producers themselves. Amazon might think twice before going on to recruit teams to provide technical sales support, but then, in our gig economy, why wouldnt it try? How much of the market could it serve profitably with a slick, low-cost sales operation backed by casual technical support staff on temporary contracts?

Targeting the Right Customers

For lube companies, the right strategic response is a comprehensive review of not only the channels where their customers buy oil but also their route to market through the supply chain and, critically, the margins that are earned by different players at different stages. This answers the fundamental question: Which channels are worth pursuing and how do they win there against established players or new, disruptive entrants?

The first step is to establish the size of each channel where customers buy their lubes, including chain repair shops, automaker dealerships and independent workshops. There are some striking differences between countries. Also within those countries, changing customer and competitor behaviors are driving further change. Notably, drivers are moving away from their own car maintenance and increasingly even car ownership, benefiting workshop business.

The second step is to chart the role of distributors and other intermediaries in each channel. They have a fundamental impact on the ability of lube makers to influence end customers in their buying decisions. We have seen steady growth in distributors share of channels like auto shops and independent workshops in many countries. Its now normal for distributors to sell several competing brands, deploying staff trained to deliver some of the customer support that used to be the preserve of lubricant producers. They are often the face of the brand to the customer, dealing with customer queries.

Lube makers need to couple this data to an analysis of the average margins they can earn from each channel. These can vary widely, even for very similar products. The margin a producer can extract from a distributor is a useful baseline against which to express the margin potential of each channel-as a simple multiple.

Tracking this over time shows some fascinating trends. Its not so surprising that margins from gas stations are quite rewarding, whereas sales of bulk deliveries to fleets often fall below the distributor baseline. But more surprising is the recent marked decline in margins from direct sales to automaker-franchised workshops in several markets.

Lube companies can go even further. Channel by channel, product by product, they can observe the margin between what the customer pays and the cost of the product. Then, critically, they can see how this margin is shared between the retailer or workshop, the lubricant producer and, if there is one, the distributor.

Putting the Data to Work

All that evidence tells lube companies which channels are more worth fighting for, which merit special focus and how much advertising, promotion or customer support is justified. They can then explore how best to win the business of customers where they want to compete.

To be successful, companies need to tailor their offers to be relevant to customers in each channel. The approach falls into two parts. To be a credible contender in the market, they will need to get the basics right. But over and above this, they need to ask themselves what special services they can (and can afford to) bring to the channel to make customers prefer their offer above all others. They might achieve this differentiation by offering technical support, training, commercial contacts or maybe access to unique events and promotions or other products and services they sell.

Its quite likely that these distinctive services will be delivered by the producer together with the distributor. Their partnership can build a successful business, and they also face a common challenge. Today, they might both be asking themselves, What can we bring that the Amazon delivery truck driver cant?

But the analysis shouldnt stop with the customer-distributor interface. In this increasingly virtual marketplace, are the lube makers logistics sustainable? Should they even be so exposed to manufacturing and transportation? Margin data may show there could be someone who could do the job for them better and cheaper.

Finally, its time to go on the offensive. Lube companies need to see themselves as more than suppliers of lubricants and related services. What their customers and consumers really value are the benefits they derive from using vehicles (or machines) providing mobility or a host of other benefits. World-class lube performance is just a means to an end. Its time for much more aggressive thinking-from outside in rather that inside out-to expand their reach further into new areas like maintenance and the broader mobility sphere. Value chain analyses can be a powerful aid to strategic step-out thinking as well.

So lets return to the exam question: Will Amazon succeed in lubricants? Thinking of our own online shopping experience, its easy to come up with the cute response: Well, is their offer any more than just telling us, Customers who bought this item also bought…?

That would be naive and not a little hubristic. To be sure, the decline in do-it-yourself car maintenance is reducing the size of the market where Amazon can simply trade on its consumer brand values. Lubricants, even in passenger cars, are steadily becoming a business-to-business game, where not only is the sale to the end customer largely determined by another business, but the distribution and delivery of product is also dictated by non-lubricant companies. Amazon has huge experience in dealing with (some might say exploiting) companies of all sizes.

The key question is how much Amazon can disrupt the market by deploying its logistics and support heft as well as its marketing position. That places the challenge squarely with established lubricant companies. Can they, by undertaking the kind of analysis we have described, so deeply understand the landscape and opportunities of their markets that they can fend off invasions into their territory from Amazon and other would-be entrants? They have the right technical expertise and current customer relationships if they deploy them effectively.

We will know Amazon has really broken through when we find customers like power stations and mining companies, which stand to lose millions of dollars in the event of plant downtime, posting rave reviews on Amazons website.

John Sargeant, principal consultant with Senka, has 30 years of operational experience in the lubricants industry in the Americas, Asia and Europe. Spyros Michalakakis is principal advisor with Senka and has over 33 years of global lubricants experience, recently leading Castrols Europe and Africa front-line businesses. Ethan Speding is research analyst and database owner at Senka. For more information, email ethan@senka.co.uk.

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Distributors    Logistics & Distribution