Although there are some significant differences in the annual volumes reported by purveyors of market research, the general consensus has moved from noncommittal pronouncements of flat to declining to more certain announcements that demand volume in the automotive lubricant segment is in decline.
There are several factors responsible for shifting this demand from neutral to reverse, and the leading one is extension of drain intervals brought about by improvements in engine design, vehicle aerodynamics, and additive and base oil technology. Oil life monitors have also helped lengthen time between oil changes, and were just beginning to feel the effects of electric vehicles and ride sharing. When taken together, these forces have screwed the cap on organic growth in demand for automotive lubricants in the United States market. This is driving up the intensity of competition.
Whereas flat to declining demand alone is enough to intensify competition in the lubricant business, we are also seeing increased rivalry among competitors due to threats and opportunities in private label, decline in brand premiums and major brand equity, and increased price pressure coming from greater buying power exercised by installers. Further, some are playing on the fringes of product quality and integrity to capture business based on price. This too intensifies competition.
As expected, there will always be casualties in a market moving through a period of an industry lifecycle like the one we are in now. Among those casualties, the greatest number typically bubble up from a pool of high-cost blenders and marketers. Although they may hang on for a period by competing on price, the odds of survival when demand declines are dubious when one is a low-price, high-cost player in a highly competitive business. Such companies typically succumb to competitive pressure, pushing their price down to a point where the business cannot be sustained.
In addition to the casualties of cost, consolidation is another earmark of an industry with fragmented supply and demand on a declining trajectory. This is because acquisitions afford opportunities to capture sizable portions of the market and reduce costs with economies of scale.
Despite the limits on organic growth opportunities, we see a number of blenders and marketers making significant capital investments in equipment, facilities and new technology to improve their cost position and capitalize on opportunities.
An example of this was seen last year when Warren Distribution invested $10 million in a new state-of-the-art lube blending plant in Houston and other upgrades to enhance its packaging capabilities. More recently, Reliance Fluid Technologies started production at its newly acquired and updated Milan, Michigan, blending plant and its plant expansions at other locations.
Similarly, we see lubricant distributors working to grow business and reduce costs by acquiring the competition. When they do, they typically rationalize products and brands, integrate infrastructures, trim headcounts, shift focus to higher-margin products and customers and take other actions to drive efficiencies and reduce costs across multiple locations and platforms.
Some of the more notable acquisitions we have seen this year alone include PetroChoice acquiring Superior Petroleum; RelaDyne gobbling up Jasper Oil, Rachel Oil, Circor Internationals Reliability Services division and Legacy Fueling and Lubricant; Mid-South Sales teaming up with Pugh-Apollo-Veterans and Halco Lubricants; and Brenntags acquisition of the lubricants division of Reeder Distributors as well as its recent acquisition of B&M Oil.
Although challenging to change, we are also seeing cost-driven changes in pricing behavior. Because parity pricing remains commonplace, a growing number of distributors are adding private label lubricants to their line-up. This affords them an opportunity to remain competitive in markets where low cost or low price is favored, while also building equity in brands that distributors own and control.
At the same time, most distributors are aligned with major brands to assure they can maintain scale and grow by competing in both price- and brand-driven markets while also participating in national account business, which is growing. Majors used to bristle when their distributors added private label to their product line, but most now reluctantly accept the realities of its need.
The significance of private label lubricants has grown so much that RelaDynes DuraMax motor oil popped up as one of the top five best-selling brands in National Oil and Lube News survey of fast-lube operators. In what some might consider an example of how one major has grown to accept and leverage the relevance of private labels, consider that Brenntag Lubricants Northeast has an exclusive branding agreement with ExxonMobil for the Exxon SuperFlo brand.
The unpleasant reality is that the U.S. lubricant business is moving through a period in which opportunities to grow organically are limited, but some companies are seeing and acting on the opportunities these market conditions present. In the process, beyond simply remaining relevant, a few companies with the necessary vision and resources are already well on the way to building new empires in the lubricant business. z
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