National accounts represent an interesting and, for many, an increasingly concerning segment of lubricant distributors business. While most distributors welcome national accounts because they bring in business a distributor would not otherwise have access to, there is growing concern about the risks associated with the amount of national account business distributors have on their books. Understanding why starts with an understanding of what national accounts are.
In the context of lubricant distribution, national accounts are sales to large companies with geographic locations in a number of states. Such customers typically have supply-side agreements with major oil companies for centralized purchasing of lubricants and account management. Lubricants sold to national accounts are commonly delivered for a fee from the inventory the major buys back from distributors representing their brand. Since the major directly invoices the account and collects the receivables, its often referred to by distributors as business on the majors paper, and the money paid to deliver the product as a buy-back fee.
Buy-back fees are significantly below what distributors typically see from accounts they serve directly (business on their paper). To illustrate this point, consider that the fees for national accounts currently range from about $0.75 to $0.95 per gallon with an average at about $0.85. While these fees have increased an average of about $0.10 over the last five years, the fees are typically 50 to 70 percent less than the gross margin realized by distributors for sales on their paper. Even though national account business brings in additional revenue, requires no sales and less service, and although it helps build distributors relationships with the majors with which they do business, it comes at a lower margin.
Another ongoing concern is the amorphous definition of national accounts. To the consternation of many distributors, the definition of national accounts tends to be fluid and has been expanded by some majors to include mid-size to large regional accounts, and in some cases, even large accounts with a single location. With that, some have seen business move to a majors paper when a major they buy from designates one of the distributors accounts as national account business.
While the expanding definition of national accounts and buy-back fees have always been concerning and sometimes contentious issues, a larger and growing concern on the minds of many distributors is the profit erosion and risks associated with the increasing amount of national account business they are taking on.
Based on Petroleum Trends International data aggregated from more than 20 mid-size to large distributors in the United States, national accounts represented roughly 20 percent to 75 percent of their business at the start of 2019, with an average of just under 50 percent. Although the low end of the range has not changed much over the past five years, the high and average for the sample set increased by 33 percentage points and 23 percentage points, respectively, from 2014 to the start of 2019.
Another important change over the past five years is the margin differential between national accounts and business on a distributors paper. The margin on national accounts has moved up an average of about $0.10 per gallon since 2014, but it lags well behind the nearly $0.50 average increase for lubricants sold on a distributors paper.
When you do the math and look at trends, it becomes clear why lubricant distributors express concerns about growth in national accounts. Simply stated, as the percentage of a distributors business in national accounts increases, margins erode. And if they dont address such erosion by raising the margins for sales on their own paper, they could be financially playing with fire.
So, while distributors typically accept national account business because it helps drive revenue and shore up relationships with suppliers, they do so with the understanding that their balance sheets could quickly get ugly if the major with which they are aligned loses a large national account. Similarly, the loss of several large regional accounts (deemed to be national accounts by majors) could add to the concern, since these types of accounts tend to switch more frequently than true national accounts. Further, the risks increase when a distributors books are heavy in delivering to large automaker groups since they tend to switch brands more frequently than other large national accounts. Such an instance was painfully experienced a few years back when Honda/Acura switched from ExxonMobil to Phillips 66.
For these reasons and others, many distributors are now reassessing the balance of the risks and rewards of national accounts to determine how much is too much. Based on the distributors PTI speaks to, the answer currently peaks at 60 to 70 percent and depends on a number of company-specific issues. Unless a distributor is comfortable with changing its business model from that of a marketer-distributor to that of a logistical arm of the major(s), now more than ever, its important to be mindful and manage margins-or thats where they may end up.
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