Need to Know
While the impact of these and other changes have reshaped the lubricants business and continue to do so, the industry is now facing new challenges. And many of the challenges it is now up against are interrelated and, according to some, represent a watershed moment in distribution.
One of the most significant challenges is the decline in lubricant demand. While many believed that demand would have bounced back to pre-pandemic levels by now, it has not. Although demand did pick up as inventories were rebuilt in the two years following the pandemic, demand remains well below the high-water mark seen in the late 1990s. In fact, in 2023 lubricant demand was close to 200 million gallons below that seen before the pandemic in 2018 and 2019.
Further, although it’s still early in the year, marketers say demand remains soft and few are optimistic that it will show much improvement (particularly in the passenger car motor oil space). While inflation and other persistent macroeconomic factors are certainly contributing to the soft demand, there are other systemic factors at play. These include a higher percentage of the workforce engaged in remote officing, market penetration of electric and hybrid vehicles, generational shifts in miles driven and the historic car-centric culture, and the ever-present quest to extend oil drain intervals.
Soft demand and rising costs (inflation) have given rise to another big concern on the minds of lubricant distributors, and that is shrinking profit margins and cash flow challenges. The soft demand has increased the intensity of competition, and with that there is notable discounting to gain and retain business and move inventory by undercutting the competition.
While such a strategy can be a race to the bottom that doesn’t end well for higher-cost enterprises and drags the brand equity of others down, it’s difficult for even the most disciplined distributors to avoid getting entangled in price wars when lubricants are core to their business. Furthermore, with prices moving down and costs moving up, margins are experiencing significant compression and cash flow is pinched.
Further aggravating the cash flow crunch is the value customers are now placing on terms. Rather than being wowed by product performance and quality, a growing number of customers are simply sending out RFQs (requests for quotes) to multiple companies and making buying decisions based on price and terms. In the words of one large distributor, “terms are becoming more of a selling point in this tough economy.” While this may be good for the customer, slowing down the cash conversion cycle with extended terms is weighing heavily on a distributor’s cash flow, liquidity and profitability.
Importantly, the focus on price and terms speaks to another leading concern on the minds of distributors: customers becoming increasingly brand agnostic and therefore more focused on price. While brand agnosticism was emerging prior to the COVID-19 pandemic, the supply chain disruptions, including deep allocations and stockouts, seen during COVID accelerated the trend. When the major’s premium flagship products were unavailable, customers were forced to turn to alternative brands (often private labels). And when they found that they had no issues with the alternatives and that they were readily available and cheaper than the major brands, brand agnosticism grew and the value of brand diminished.
Importantly, distributors say that while brand agnosticism is most prevalent in the PCMO space, it is expanding into the commercial and industrial sectors. Although customers still place value on brand, brand is losing its value as a point of differentiation. With that, business is becoming more transactional and increasingly focused on a “What’s your price?” mentality.
Integral to a distributor’s success in addressing each of the above challenges is what some believe may be their biggest challenge moving forward. The “silver tsunami” of seasoned employees exiting the workforce is a critical and pivotal issue distributors now face. The growing number of retirements are leaving huge deficits in knowledge, experience, skill and customer relationships resident among lubricant distributors. The gap is real and those who lead in closing it by recruiting, training and retaining strong capable talent will have a true competitive advantage.
After all, if you want to grow business in a declining market where there is greater intensity of competition, erosion of brand equity, increasing focus on cost and price, and reliance on digital technology, it’s all about the people. They will be the ones optimizing supply chain logistics and costs, implementing and leveraging technology, identifying business opportunities, pivoting in response to changing market conditions, and knocking on doors and adding value to build strong relationships, customer loyalty and ultimately the future of the business.
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