A Perfect Fit

There was a time not too many years ago when motor oil was on the leading edge of a price war being waged among mass merchandisers, and the jobber was caught in the crossfire. Retail pricing dominated the landscape, and loss-leader oil changes weren’t far behind. How things have changed.

These days, you would be hard-pressed to find a consumer who is unaware of the rising cost of petroleum products, and while businesses in every channel still strive to be competitive, there is a sense that there is some sanity in the market–a quality that was largely missing in the early to mid-’90s.

Underlying much of the shift is the dominance in the volume of motor oil being sold through the mechanic-installed channel.

“In the last 10 years it has shifted about 15 points [to about 80/20 mechanic-installed/do-it-yourself split], which is pretty substantial,” says Anthony Stadelman, marketing director of Wakefield Canada, Castrol’s marketing and distribution partner in Canada. “What we surmise is that this [remaining 20%] represents the true DIYer. This is a person not motivated by the savings, but by the fact that they enjoy doing it,” he says.

“We think that the shift was actually driven by changing lifestyles and the changing times, but we think that the retail price points have also driven it,” he adds. “Ten years ago you could buy a litre for $1.49; now it’s $3.99. I will say that the large retailers have done a good job of making sure that they kept their share.” But, he adds, fringe players such as grocery outlets and hardware stores have also diverted their attentions elsewhere.

For those outlets in this group who still have motor oil, it has migrated to the bottom shelf. “It’s there as a convenience item, and sometimes a loss leader,” Stadelman offers.

The shift, it should be noted, has probably settled into a plateau.

“That shift has occurred over a fairly long period of time,” says David Portalatin, director of industry analysis for the NPD Group, a leading market research firm. The group is perhaps best known in the U.S. for its point-of-sale retail tracking surveys that provide reliable information in many categories; however, limited access to that information in Canada has not allowed them to duplicate the service here. But Portalatin says that NPD’s AutoTrac survey, which polls some 38,000 consumers every month in Canada, indicates that the do-it-for-me (DIFM)/do-it yourself (DIY) split has stabilized.

“Over the past eight quarters, it has been relatively stable; somewhere between 78 to 79% [of consumers] have their motor oil professionally installed in Canada.”

He makes a point of noting that Canadian behaviour is markedly different from the U.S.

“The shift has occurred, but most recently consumer behaviour has suggested that it is relatively stable. In the U.S., the market dynamics are considerably different; it’s close to 50/50.”

This seems to be borne out to some degree, and requires different strategies. Chevron, for example, launched a major U.S. initiative with the addition of the Deposit Shield formulation to its Havoline brand in the U.S., including repackaging and a stated goal of moving the brand upmarket. In Canada, to date the company has yet to launch the brand, due at least in part to the modifying effects of Havoline’s smaller retail presence in the marketplace.

And Valvoline, for its part, has seen its fair share of pressures come to bear in the retail-driven U.S. market. Some 34% of that company’s sales are DIY, greater than the DIFM share.

“We have experienced a continuing shift of the motor oil marketplace from the do-it-yourself segment to the do-it-for-me segment. These markets require different resources and strategies to succeed. We are designing our business model to address this dynamic market shift,” Marvin Quin, CFO for Valvoline parent Ashland, said at the company’s October 2006 shareholder meeting.

Quin went on to talk about the challenge of changing pricing in the market, focusing on the narrowing gap between the cost of raw materials and the price in the market.

“Since March of 2005, the gap between these two lines has narrowed. Early on, we were able to successfully navigate this cost environment, until September 2005 when Hurricanes Katrina and Rita knocked out much of the U.S. lube stock production. Although the impact of raw material cost increases can be felt within weeks, it can take up to six months to fully implement price increases in some markets, due to competitive pressures and promotional commitments.”

While it is clear that the price increases didn’t get through as quickly as the company might have liked, a decade ago the mere suggestion of a price increase going through would have been laughable. The comments also serve to offer some understanding of the different factors affecting the market.

In addition to these “upstream” influences are ground-hugging market factors like the age of vehicles and good old-fashioned competition.

“I think that what is interesting is how the DIYer is likely to be younger and likely to be of moderate income,” says Portalatin. Affordability is, he says, still a key driver within the DIY marketplace, though he cautions against ignoring the diversity of customers at all levels of the market.

Of greater concern to the traditional aftermarket is the stiff inter-channel competition for the DIFM dollar, a market driven largely by the makeup of the vehicles on the road.

“In Canada, car dealers capture about 39% of the professional installed business. This is the leading share by outlet type. Their business is going to skew heavily toward newer vehicles.

“As they enter their fourth year to seventh is where we really see a shift [to other channels],” leaving the independents, mass merchandisers, and specialty outlets left to fight it out.

“We could see this coming 10 years ago,” says Mark Reed, director of marketing, Pennzoil-Quaker State Canada. “The challenge you have is within the DIFM channel. All the talk is about how to get your share of the DIFM.

“People are more predisposed to heading back to the dealers, for warranty issues or check engine issues. The challenge for the independent is to get their consumers to stick with them. All the surveys show that they are at the top of the list [in customer satisfaction]. But you have to be able to market your business to your consumers, and to make sure they have an excellent customer experience,” says Reed.

“If I have seen any trend, the car dealers have got a significantly greater piece of that business than they have ever had,” says Michael D’Ilario, country manager, Canada, Chevron Lubricants Canada. “One of the things that the dealers have done well in is that in addition to being more price-competitive, they have also incorporated the service aspect.”

He says that despite the strong car dealer performance in the market, the increasing reliance by the consumer at large on the DIFM business is good news for the independent service provider, and consequently for the jobber that supplies him.

“I think that it provides a greater opportunity for the independent installer to service the segment.

“At the jobber level, it provides an opportunity for them to sell more bulk oil. What this does for the jobber is that as the DIFM grows, there is an opportunity for him to grow with his target customer, which is really the independent installer.”

Done right, he says, the oil change is a business-building opportunity.

“The oil change is an opportunity to provide a value-added service. It is not just about the oil change. It is about expert service. Whether that is a 30-point inspection or a tire rotation, it provides the installer with an opportunity to make money with oil changes.”

Accompanying the DIY-to-DIFM move is the shift in pricing strategies that has occurred.

“The football at one time was a function of some pretty big retailers trying to stake a position in the marketplace,” says D’Ilario. “Today it is just
as cost-effective for a consumer to go the installer to get his oil changed, and the installer can make a profit at it.”

To some extent, he adds, the changes in the profit potential are a result of changes in the bulk oil business. Unit costs of bulk oil are higher than they were a decade ago, and so the overall price is higher. Also, he adds, cutthroat pricing at the mass merchandiser level–“a lot of which had no relation to cost; they were just trying to buy share”–has virtually evaporated.

“Based on the aggressive retail pricing that was in the marketplace years ago, the delta between the bulk oil acquisition cost to the installer and the retail price point was very small. The delta today is significantly greater.”

In other words, there is now room to make some money.

“I think that more and more installers understand that positioning than they did even three years ago, and not using it as a loss leader. For the installer, that has to be positive.”

It is something that Paul Dossman, general manager of Auto Sense shareholder KC Automotive in Owen Sound, Ont., has seen in his market.

“Some are down to $35, but most places, an oil change runs between $35 and $50.” The good shops, he adds, are packaging an oil change with an inspection service. But they’re still looking at it as a place to make some money, or at least not lose any. The flipside is that the inspections almost always turn up some necessary work.

That is, he says, also how a few customers justify their $19.95 offering: it gets cars in need of repairs into the shop. “The sad part is that those are the ones not doing an inspection. [They are charging so little] they can’t afford to spend the time. It’s just dump, fill, and go.”

“The funny thing about this whole shift [from DIY to DIFM] is that the retailers get the concept that they have to pass along price increases to consumers,” says Wakefield’s Stadelman. “They protected their margins, so the oil business is still effective for them. But I don’t think that has translated well to the aftermarket at the service provider level.”

While he says that the impact of local competition can’t be discounted, the push to offer low-ball pricing on an oil change is wrongheaded.

Stadelman adds that jobbers are in a key position to help shop owners understand how well they are perceived by their customers. They have a level of trust that is borne out time and time again in J.D. Power and Associates’ Customer Satisfaction survey.

“It is an education process,” says Stadelman. “People are coming to them because they trust them and they like them. When you drop your car off, you talk to the guy who owns the business and people appreciate that. Why else would people go? It is that personal connection; you don’t need to sell yourself short.”

Reed echoes the sentiment that the price market has, if not evaporated, at least become less than dominant. More to the point, he says, many service providers are missing the opportunities that an oil change presents.

“A lot of the guys are missing opportunities on various things, like offering the consumer a choice of oils. For example, [with] a car that has 120,000 kilometres or more on it and is dripping a little, you should suggest high-mileage oil. There is definitely a way to do it.”

Menu-type pricing is more prevalent now than ever, he adds, taking a page out of the car dealer’s playbook.

“The independent shops can always do a good job, but the dealers are doing a good job, too, and a phenomenal job with the female customers.

“The so-called aftermarket needs to be that way. It’s not about who’s the cheapest; it’s about who can do the job right. It’s about the service experience.”