The Balance of Power: Bigger and Stronger Distributors

Such pressure comprised a combination of carrots and sticks, including contractual obligations, establishing key performance indicators (KPIs) related to brand representation, implementing financial incentives and penalties, establishing preferred distributor status, and others. And if a distributor failed to make the grade, it often resulted in contract cancellation or nonrenewal.  

It was a tough time for lubricant distributors, with many having to scramble to find a new supplier and convert customers to other brands, sell the business or shut the doors. But as Nietzsche once said, “Out of life’s school of war—what doesn’t kill me, makes me stronger.” And for the lubricant distributors that survived the war of consolidation, most emerged significantly bigger and much stronger than ever before.  

To get a sense for how distributors have grown in size, consider that a large distributor back in the days prior to the first wave of consolidation was selling a few million gallons of lubricants per year, had three or four locations and operated with roughly 60 employees. Today, the largest distributors sell close to 70 million gallons, employ over 1,000 people and have a national footprint.  

In addition, while many distributors used to represent two or three major brands, today most of the leading distributors are now aligned with just one major brand. So, in this regard, the leading majors have been successful in culling the herd down to the best of the best, reducing costs, strengthening brand alignment and fostering stronger, more productive distributor relationships.  

But the consolidation process did come at the cost of and risk to the majors. By reducing the number of distributors they do direct business with, the majors increased dependency on a smaller number of distributors controlling a larger share of the market. With that, the majors are more susceptible to supply chain interruptions should, for example, one or more of its distributors experience significant financial or operational issues. Furthermore, the possibility exists that a very large distributor could flip the script by dropping a major’s brand and leaving them scrambling to find a new distributor.  At least one example of this was seen when a large distributor walked away from a major brand in the Northeast.  

Because of these and other issues born from the concentration of market power among fewer distributors, there has been a shift in buying power and a reduction in concern distributors have historically had about contract cancellation or nonrenewal.  This is not to say that it is a buyer’s market in favor of distributors, or that the possibility of losing a supplier contract is not a concern. Instead, it means that distributors now have greater leverage to negotiate more favorable agreements due to their larger size and the increased dependency majors have on the distributors remaining in their networks.  

The increased leverage also points to majors being more hesitant to cancel or not renew contracts. With most sizable distributors now aligned, it would be very difficult for a major to replace an existing distributor. And even if it did, there is a high risk that the process would have a significantly negative impact on the major’s market presence and sales.  

In addition to there being a limited number of potential replacements to select from, distributors have shown a remarkable ability to convert their customers to other brands when their contracts are not renewed.  Important here, however, is that a large percentage of the volume distributors sell is often tied to national accounts. While a major could feel substantial pain by not renewing a contract, the loss of national accounts could also have a significant and negative impact on the enterprise value of a distributor’s business. This is a particularly concerning issue considering that several of the largest distributors are owned by private equity. 

So, in sum, although consolidation and alignment has caused a shift in power to bigger and stronger distributors, the net of the shift has resulted in more balanced alliances in which majors and distributors have more secure, stable and sustainable contractual relationships.  

But there is one area where the shift in power may ultimately give a decided edge to distributors, and that is private label. In years past, distributors used to try to keep a relatively low profile on their private label volume so as to not raise the ire of the majors by cannibalizing sales of the major’s brands they represent. But what we have today is very different. Many distributors are more aggressively—and successfully—marketing their private label brands, and some of these brands have a national footprint and growing brand name recognition.  

Further, these private labels are increasingly penetrating fast lube chains, new car dealers, fleets and other sectors, including some industrial sectors in which the majors have historically ruled the roost.  But while you can be sure this is affecting the major’s brand recognition and market share, it appears that with the rebalancing of power brought about by consolidation and alignment, they have little choice but to accept it as well as the tougher times it may bring in the future.  

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