National accounts are an important segment of the lubricant business for both majors and their distributors. When taken together, they make up close to 50% of the major brands sold in the United States, and the number is growing. But as the percentage grows so do concerns expressed by lubricant distributors. To understand the concerns, start by looking at what national accounts are and the business model.
In the lubricants industry, national accounts comprise the direct business major oil companies conduct with large buyers of lubricants, most often with large geographic footprints. Although majors sell, service and invoice national accounts, they rely on distributors to deliver the product. They do so by buying product back from the distributor’s inventory to deliver to national accounts. The major then pays the distributor a fee after the delivery is made. Both the charges and payments are made electronically.
While the model itself is fairly simple, the devil is in the details, and this is where distributors have concerns.
One example that distributors often speak about is the differing levels of service associated with each account. While some deliveries are a simple drop-and-go along a distributor’s existing routes, others require distributors to go well out of their way. This is especially troubling for distributors in rural areas, where accounts are scattered and distant.
In addition, some accounts consume considerably more time than others due to security, waiting for and maneuvering to loading docks, and processing bills of lading. While some majors are sensitive to these differences and address them with deliverer fees based on levels of service specific to each account, others do not. Instead, they say the differing scenarios were taken into account when they arrived at the fixed fee applied to all deliveries. The former approach raises questions about who decides what service level and delivery adjustments are affixed to a given account, and the latter brings to question the ability of a major to build special circumstances into a flat fee without input from its distributors.
Minimum order quantities are regularly cited as another concern when distributors speak about buyback business. The issue is that distributors say a growing number of national accounts place orders for small quantities. This is notably the case with fast lubes, which must contend with a growing variety of product types and grades of engine oil and transmission fluids.
While some majors have minimum and rush order stipulations written into national account agreements, distributors say they are not enforced. Further, only one major has a defined minimum for national accounts and a mechanism in place for its distributors to put through charges. Of concern, however, distributors say that if the majors are charging national accounts the fee, the distributors have yet to receive any payments for the minimum orders delivered. The same issues apply to rush orders.
Adding to these concerns, distributors say the costs required to take and process buyback orders has grown considerably over the years. While majors have online portals that their direct-served customers can use for ordering, distributors say the usage rate is less than 50%. Rather than ordering through the portals, the majority of national account orders are placed directly with the distributor. The same often occurs to resolve order discrepancies, reconcile part numbers and address other account-related issues. As a result, many distributors find it necessary to employ at least one dedicated person to handle national account business.
Another leading concern around buyback fees is the variable and fixed costs tied to fuel, labor, truck maintenance, insurance, lubricant storage and transaction processing. While these costs continue to climb, buyback fees are slow to change. Over the past 15 years, buyback fees did no more than follow the 2% average annual inflation rate. Distributors say it’s unrealistic to adjust fees based on the CPI and this year provides a glaring example. While the inflation rate increased to 5% in June, distributors say the combined cost of fuel, driver wages and truck maintenance has surged to 35% since the start of the year.
In fairness to the majors, at least three recently added 10 cents per gallon to their buyback fees to address the increases in transportation costs and smaller deliveries to national accounts during allocation. Even so, distributors say the adjustment covers only about half the actual increases in cost.
In addition to these costs, some distributors express concern about the capital expenditure required to separately assure the quality and integrity of product for national accounts. While they have full confidence in the quality programs and processes currently in place, at least one major wants more, and for some this means buying dedicated tanks and trucks. A truck alone can cost more than $300,000. This could be a back breaker if the national account switched between brands before the capital expenditure is depreciated.
Although distributors express additional concerns when talking about national account business, the objective of this column is not to make it a platform to grumble or spread discontent. Instead, it’s to say that as the number of national accounts have grown, so have the costs associated with them. According to many distributors across the country, although they understand the majors know best what it costs to make a gallon of lubricant and service the business, distributors know what it costs to deliver to national accounts and manage that part of the business. For these reasons, distributors say they and the majors they do business with can benefit from more communication and collaboration in pursuit of this growing segment.
In the absence of such communication, there is real danger that relationships will fail to be symbiotic. If that occurs, the health of both parties suffers and relationships can be challenging to sustain.
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