Price and cost in the lubricants business have garnered a considerable level of attention over the past few years. Whether you are looking at base oils, additives, transportation, packaging, labor or other checks written or deposited in the name of lubricants, such attention comes for good reason.
In the past two years, the price of base oils has moved up seven times, additive prices have moved up by roughly 12 percent, and there have been 6 announced finished lubricant price increases (one of which was rescinded). In addition, tariffs and other factors have pushed up the price of drums, totes and other packaging. The labor shortage also has hiked the costs of gaining and retaining employees, particularly drivers.
With costs for so many inputs seemingly going up, a growing chorus of finished lube producers are expressing concern about important numbers that are not increasing at the same pace as others and are, in some cases, retreating. Specifically, when finished lubricant increases fail to keep pace with rising costs, theres reason for concern.
Since transparency is greatest at the retail level, prices there provide an accessible, yet somewhat limited, glimpse into pricing dynamics in the motor oil segment. For example, at several of the leading auto parts chains over the past two years, the price for a quart of some of the major brands synthetics has been relatively static. Interestingly, the retail price of conventional motor oils at auto parts stores showed increases ranging from $0.30 to nearly $1.25 per quart. Similar but less pronounced pricing dynamics are observed at big box stores.
Retail prices also hint at more confident yet competitive pricing of private label brands, particularly at the base of the full synthetic tier. While the leading private label retail brand was priced nearly 50 percent below the major brand average in 2008, it currently prices at roughly 30 percent lower in quart bottles. At some auto parts chains, prices are 25 percent below leading brands.
As always, there are exceptions to pricing dynamics when considering specific brands, viscosity grades, packaging, stores and locations. Even with that, current pricing dynamics in stores suggest that there is less margin through the supply chain for conventional oil and that it is a declining segment. Because of this, retailers promote it less, and cost increases are passed along the entire chain. With synthetics now the darling and retailers making more money on them, they are promoting them more at discounted prices, aided by the majors competing for share in that space.
The important takeaway observed in retail pricing is that the price of the workhorses in passenger car motor oil is moving up at a slower rate than it has in the past, and in some cases it has retreated. In addition, the gap between leading brand PCMO and private label is closing.
To illustrate this point, consider that in 2005 the average price for the leading brands of conventional PCMO at Walmart was $3.12 a quart. The stores SuperTech brand was selling for $0.84. That gap has closed significantly, however, with SuperTech currently selling at 67 percent of the average price of the leading brands.
Understandably, some of the general pricing dynamics and trends seen in the retail space are also observed in the do-it-for-me segment. As in the retail space, private label has made significant inroads into DIFM. However, while the price gap between private label and brand leaders is condensing in retail, the compression is less pronounced in DIFM, and the gap there may now be expanding due to what some say is starting to look like a race to the bottom to capture business with private labels.
But where is the bottom? And will it respect the same cost realities for oils that meet minimum specifications recommended by OEMs and monitored by licensing programs such as APIs Engine Oil Licensing & Certification System?
If instead some based it on the cost of using flush oil; waste oil; unapproved base oils, additives and polymers; unlicensed oil and home brew recipes, the race to the bottom on price could get very ugly. It could leave a path of damaged engines and transmissions along the way, tarnishing the hard work and growing pains suffered by private label in order to demonstrate that it is a lower price alternative thats on par with major brands by meeting the same minimum specifications.
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