Turning Black Gold Into Real Gold

If there were ever a theme to the motor oil market, it would be how to make more from less.

“We have some customers who own GM cars that have an oil change light,” says Jim Davenport, president of Davenport Automotive in Orangeville, Ont. “Some have gone past 12,000 km without the light going on, but when the owner talks to the dealer, they tell them not to worry about it until the light comes on.”

It is, he says, a worry for future business.

Longer oil change intervals are a key culprit in the flattening of overall demand, but there are also issues surrounding tight margins on many grades, and then there is of course the issue of market share.

There may be little if any volume growth in the oil change market, but that is no reason to settle for lacklustre growth in profitability.

There is no debate that the oil change market has been a beleaguered part of the aftermarket for some years. Ever since retailers in general, and certain mass merchandisers in particular, decided to treat certain grades of motor oil as loss leaders to draw customers, jobbers have seen increasing price pressure on motor oils across the board. Few customers, of the trade or consumer variety, are interested in knowing that the prices they saw advertised in the local paper were only for a short time on specific brands and only for specific grades.

And, whether a jobber has yielded entirely to this pressure or not, he has certainly felt the sting of thin margins.

Nobody has been left out. From the garage owner in the bay, all the way upstream to the product manufacturer, the pressure to create profits in the face of these market realities has caused many to seek lower costs, rather than higher profits through increased sales and margins. The key opportunities for these have settled into the mid-premium and premium markets.

“The high mileage market is continually growing,” says Dennis Favaro, Valvoline Canada. “I can only say that it is definitely a growth area. If the guys in the jobber network aren’t looking at it, they should.”

Favaro says that the potential of this category has been recognized outside the aftermarket. He quotes from a U.S. retailing trade publication article: “Chemicals and fluids are not expected to be a high growth category. Neglect of maintenance and a sluggish economy [are among the reasons].

“Certain niche products are viewed as promising, though, including high-mileage and SUV [motor oil products].”

Richard Wright, operations at A.P.M. Limited in Moncton, N.B., agrees with the attraction of these oils, but offers that the niche aspect of the products limits their potential.

“That type of product appeals to a small percentage of our clientele. There are people who perceive the added value and are willing to pay for it, but it is a very small percentage.”

Still, he adds, it’s nice to get a bit of extra margin.

Just how much margin is one of the sticking points, and is potentially one of the most crucial factors that may be limiting the potential of motor oil products in the high-mileage category.

Investigations published last November in Jobber News revealed widely varying methods of determining the price of motor oil at retail. These often resulted in a price point for these products that is fully 25% above that being charged at straight retail outlets, and as much as twice the price being asked for 10W30 within the same jobber store.

“They are not price-positioning the product,” says Favaro. “They aren’t using any marketing mentality.”

The high-mileage products should be priced at a premium of about a third over standard oils and grades, he says.

Favaro says he understands the pressures to price-manage hundreds of thousands of SKUs, but adds that the end result is that many jobbers are leaving money on the table, through this and other practices.

“You have to stop just managing your cost and start managing your revenue.”

That may be a hard sell in a market with flat demand, but those who have turned their attention that way have seen results, according to Vinz Pingol, DIFM marketing, Castrol Canada.

“We are always trying to bring that to light and to the forefront. Cost management is definitely important, but if you’re not selling the services, it is irrelevant what you’re paying for them.”

Perhaps it is a lack of faith in the products or in the market, or perhaps it is a lack of faith in themselves that leads some jobbers and service providers to take a silent approach. Those who do talk to customers about the niche products have seen results however.

“In surveying millions of transactions, we found that customers who purchased synthetic motor oil tended to spend a lot more money on all the other products,” says Pingol. He counters arguments that synthetic oil changes keep customers away from service providers with the research finding that the the increase in service interval is only about 1,200 kilometres.

That research, conducted in the U.S. by an independent firm, also found that customers of synthetic oil products generated 56% more gross profit over a 32,000 km period as compared to conventional oil customers.

“Synthetic definitely has a firm place in the good-better-best discussion. Remember, synthetics have been around for a lot longer than high mileage.” Acceptance should come in the latter, he adds, in probably half the time it took synthetics to reach a similar level of acceptance.

Naturally, many of these financial benefits in margin can flow upward to the service provider’s supplier. The impetus to do so, however, flows top down, sometimes as slowly as a 20W50 on a cold winter’s night.

Mark Reed, director of brand management, Pennzoil-Quaker State Canada, says that realization has caused his company to redouble its efforts in the field.

An important component is to communicate the key points of premium products.

“Not to jam it, but to recommend it. We work hands-on because our whole objective is to shift the mix to the higher-margin products. We have the information and sit down and do a business review with the customer. We are really teaching them about their business.

“It really has worked tremendously well. That is going to make the difference between the guys who win and the guys who don’t.”

One customer, who he says is destined to be a winner, takes the premiums offered from time to time and displays them in the customer area as a prize for consumers. It’s just the most visible evidence of that service provider’s customer-centric approach.

Another service provider I know ran a promotion on free oil changes, saying that there were few cars that didn’t require several hundred dollars of honest work.

Reed says that those who put into action strategies like these have seen significant results, such as a 20% improvement in the mix between conventional and premium motor oils.

“It is not rocket science. It is a little education, but it is probably the best thing we have done to help our customers in business.”

“All of the customers, most of them anyway, will try to talk their customer into a better quality filter and a better quality oil, but by and large most installers look at the oil change business as a necessary evil,” says A.P.M.’s Wright. “They have to tie up men and equipment and don’t make any money out of it. But it does bring people into the door.”

Calling consumers smarter and more cynical than they used to be, he says that there continues to be a significant proportion of the public who just want the cheapest products available.

“They want the 10W30 even though their car calls for 5W30. I have seen a lot of that and I have heard of bad experiences when they do. I don’t think the car manufacturers have done a good job of telling people that these oils are necessary.”

Getting past that barrier is obviously a first step in improving the oil business, but it is not the last.

“The average person doesn’t have a clue what to put in their car,” says Davenport. “Some of the garages are telling them that it calls for a certain grade. There are a lot of garages explaining that their car calls for a different grade and t
hat it will cost more.” And, he says, customers are taking a well-put argument to heart.

Those same garages are making the oil change work for them by performance inspections and looking for legitimate service opportunities.

Some customers will always go for the lowest possible price. Others will consider the premium products. Perhaps it would be a good idea to use a customer’s motor oil decision as a qualifier.

As indicated in the Castrol research, premium oil customers are the best bet for other work. This is an important point worthy of communicating to service providers. “All the myths about why they don’t want to sell synthetic motor oil have been laid to rest [in the research],” says Pingol. “Everybody comes out a winner when they know what you’re offering. With more knowledge comes better decisions. And with better decisions comes more money.”