KEEPING AN EYE ON OIL

From wellhead to service bay, the motor oil supply chain may be under pressure, but you can still increase related revenues

Hikes in the cost of crude oil seemed, well, somewhat crude in the months leading up to January 3–when the allimportant commodity surpassed a value of US$100 per barrel for the first time in history.

But why was the price of motor oil relatively stable in the midst of these increases? Most Canadian companies were able to “ride out the storm” of higher crude costs because of the high value of the

Canadian dollar, explains Kent Rennie, vice-president of sales and marketing at Wakefield Canada, which distributes Castrol products.

“We’ve even seen price reductions [from] some of the companies this year,” adds Sean Meghen, a marketing specialist with Noco Lubricants Canada. “It’s the first time I’ve ever seen it.”

The question of whether jobbers can expect price increases in the coming year seems to be a matter of debate. Meghen, for example, suggests that oil companies will be wary about introducing higher prices for motor oil in the midst of a soft economy. Rennie expects other market forces to overtake that concern.

“There is a round of increases being implemented in the U. S. for all channels,” Rennie says. “I would suspect that there will be a direct correlation in the Canadian market sometime by mid-year at the latest.”

While price increases could be tempered by the market realities of a soft economy, there is no denying that a costly barrel of crude will still have an impact on the price of producing motor oil.

“That barrel, in some way, gets separated into everything we use in life, from transportation to packaging,” notes Alain Portelance, Shell Lubricants’ brand manager, consumer lubricants.

Potential price increases aside, the motor oil market continues to face other pressures as well. Overall sales in the PCMO (Passenger Car Motor Oil) category continue to fall as automakers extend oil drain intervals and introduce oil-monitoring systems into a wider array of vehicle models. According to Rennie, last year’s PCMO sales were down by more than 2%, largely because of such changes.

Tough economic conditions could have their own impact on sales in this product category. A lack of discretionary income can convince some consumers to wait until the last moment for an oil change. For that matter, vehicle owners may also be travelling fewer kilometres per month.

Even vehicle financing options– specifically, the love that Canadians have for leased vehicles–are making their presence known in motor oil sales. According to research cited by consultants at Capgemini, 45% of new Canadian vehicles are now leased, compared to the 29% that were leased in 1995. And those who lease their vehicles are not exactly rushing to change their oil ahead of schedule. Let the vehicle’s next owner deal with the increased engine wear.

Opportunities to be had

Despite the challenges in the market for motor oil, there are new business opportunities to be had.

“The growth segment is still the synthetic segment,” notes Portelance.

Indeed, recent research by Lubricant Profiles suggests that synthetics and synthetic blends accounted for a mere 8.2% of Canada’s PCMO market in 2006.

“They’re big in the States, but they’re really just grabbing market share here,” Meghen says. “In Canada, it’s pretty much essential with the cold weather we have.”

Vehicle manufacturers are supporting the related sales in their own way.

“You’re getting more cars now that require [synthetics] from the factory,” agrees Portelance. “The performance benefits are going to start being more understood. There is a lot of energy being spent explaining the benefits.”

“As far as synthetics go, they are truly for someone who is passionate about their car. [These consumers] will spend that money,” Rennie says.

The potential for a growth in sales bodes well for jobbers, since synthetic products offer the promise of higher profit margins. And the potential buyers of premium products are not limited to the owners of the newest cars.

Canada’s aging vehicle population may present its own business opportunity, Rennie suggests, noting that the market for high-mileage 5W30 and 10W-30 products grew by as much as 20% last year. Buyers seem hungry for the formulas that promise answers to deteriorating seals, brittle gaskets, and wearing piston rings.

“The consumer gets it.”

That understanding is particularly important when you

consider Canada’s aging vehicle fleet. An average Canadian car is owned for eight years, compared to the average fiveyear ownership of its U. S. counterpart. There is no indication that this will change any time soon.

This is good news for independent repair facilities in more ways than one. Data from JD Power and Associates show that dealerships dominate the lube, oil, and filter work on vehicles that are between two and three years old, accounting for 78% of the available work. But independent shops claim ever-larger chunks of the business as vehicles age. By the time vehicles are between four and seven years old, dealerships are controlling just 55% of the market.

Once vehicles are eight to 12 years old, independent repair shops are conducting 27% of the lube, oil, and filter service, while car dealerships account for 26% of related maintenance. Quick lubes, meanwhile, account for 12% of oil changes on this fleet of older vehicles.

Meanwhile, U. S. consumers have also been quicker than their Canadian counterparts to embrace synthetic blends. In Canada, full synthetics outsell blended formulas by a factor of 20 to one, Rennie says. Compare that to the U. S., where blended formulas outsell full synthetics by a factor of three to one.

“Blends are the misunderstood child of the motor oil (market),” Portelance observes. “Where we’ve had more success as a company is when we made the blends more of a fit for purpose.”

Rather than trying to explain specific benefits to consumers, it can be easier to describe the products in relation to their application, he says. Quaker State’s offerings, for example, are marketed as formulas for trucks and minivans, 4x4s, or winter conditions. “We’re all trying to find the better way to get the message out.”

Regardless of the oil being sold, most shops understand that oil changes are an important tool to ensure that consumers return to their service bays several times a year. This means that shop-level buyers will be particularly interested in any related help that jobbers can offer.

“The education on the types of oil, the benefits of [synthetic products], and taking the time to educate the customer would go a long way,” Portelance says.

“We all have a part to play.”