Although there has been considerable consolidation in the lubricants business over the past few decades, you can be sure there is more in store. The big question is not if there will be more; its who will be next and what regions will be impacted. Further, what impact will consolidations have on competition and customers, market share and the balance of power between manufacturers and distributors?
One approach to answering these questions starts with building a map of lubricant demand in the United States. In what should come as no surprise, demand for lubricants is greatest in states where there is a high level of manufacturing activity, commercial transportation, agriculture, mining, construction and other applications consuming commercial and industrial lubricants.
Adding to this is transportation demand, especially coming from regions with high car counts. By combining the demand volumes from each of the market segments, a demand map helps bring into focus areas of interest in terms of market threshold at the state level.
The next step in getting your arms around where additional distributor consolidation is likely to take place is to layer distributor count and land area data onto the map to get a view of market range. Although the number of distributors in most states is relatively proportional to volume, and can be supported with available demand, areas with a higher probability of consolidation start to come into focus.
Some of the big acquisition targets are in states with relatively high demand dominated by a small number of distributors. At the same time, there are states at the other end of the spectrum, where distribution is still relatively fragmented and opportunities still exist to pick up smaller acquisitions.
Whereas such an analysis is directionally helpful, there are many other factors that drive consolidation and point to who might be next, and where. Some of these less-visible (but equally if not sometimes more important) factors driving consolidation must also be considered.
First, there have been and always will be deals that are very hard to predict. These are born from long-time friendly competitors coming together for myriad reasons. They are usually in the making for years until retirement, health issues, estate planning or some other personal event triggers a sale.
Second, the big deals we see are combinations often driven by distributors looking to strengthen their business by aligning with major suppliers. This can occur in regions where there are brand and channel conflicts due to geographic overlap. Such is the case in a number of states where there are two or more distributors aligned with the same major brand.
Although it is often said such distributors can coexist, competitive pressure and economics are making it increasingly difficult. As a result, when you add a layer to the map showing brands, you get a sense for where channel conflicts exist among suppliers and a much clearer vision of where additional consolidation is most probable. And the picture becomes even clearer when zooming in to the county level.
Third, consolidation may also be driven by what sounds like the start of a change in thinking among some distributors that could challenge the path many have taken. That change is an outgrowth of the large volumes some distributors command as a result of consolidation, as well as the balance of power that exists between them and the suppliers they are aligned with.
Although a major will typically favor a large, aligned distributor and use carrots and sticks to encourage it by aggregating volume through the acquisition of companies with like brands, the appetite of many lubricant buyers tends to favor choice. This is especially the case in times of price volatility, as we have been seeing. As a result, some distributors are expected to push back on alignment; they may look to increase sales and valuations, and to reduce risk by expanding the range of their hunt for acquisition targets and the brands they have in their quiver.
When these less-visible issues are combined with the other layers on the map, there are a number of states that stand out as having the highest probability of further consolidation, including California, Florida, Georgia, Illinois, Michigan, Ohio and Texas, to name a few.
Regardless of what drives acquisitions or where they are on the map, its important to keep in mind that, although we were in the spring and summer of consolidation for the past 30 or so years, we are now moving into the fall. And with that change in maturity, there is increased competition and urgency to bag the big bucks through acquisitions before such opportunities become scarce in the autumnal lull and into the winter of the process.
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