January 30, 2019
Volume 3 Issue 4
U.S. Distributors Trend Towards Consolidation
On Jan. 8, Pugh Lubricants, Apollo Oil and Veterans Oil, which identify themselves as a single lubricant and fuel distributor, announced the acquisition of Halco Lubricants – another distributor based in Norcross, Georgia. Eleven days later, the combined business announced yet another acquisition, this time of Mid-South Sales, a Jonesboro, Arkansas-based distributor of lubes, fuels and related products.
Apparently the trend of consolidation in the lube distribution segment is alive and well.
Petroleum Trends International President Tom Glenn certainly thinks so, suggesting in an interview that the segment is in the “summer” of consolidation. PTI is a lubricant industry consulting firm based in Metuchen, New Jersey.
“It’s very prevalent, it’s very hot and I think it’s going to continue,” Glenn said. “At the same time, I think that just by virtue of the numbers, the process of consolidation results in fewer companies able to consolidate, so fall is on the horizon in terms of how much more consolidation can take place.”
Numerous lubricant distributors across the United States have been part of mergers and acquisitions in recent years. Pugh, Apollo and Veterans joined in 2017. Cincinnati-based Reladyne and Ft. Washington, Pennsylvania-based PetroChoice have also completed a number of acquisitions in recent years, and PTI says there have been numerous other deals.
In some cases the owners of acquired companies are nearing retirement and looking to exit the industry. Acquiring or merging companies often are looking to expand their geographic footprint and to gain economies of scale. Whatever the reasons, Glenn said the trend, however, is impacting the industry in several ways, including reshaping the relationship between major lubricant companies and their distributors.
The most obvious side effect is the increasing size of distributors. Twenty years ago a distributor supplying 1 million gallons or 2 million gallons of lubricants per year was considered to be large, but that’s no longer the case, Glenn said.
“Today, you could see some distributors of 75 million gallons, which puts them as big as at least one major brand out there, probably bigger,” he said. “The size is the most obvious and most significant impact [consolidation] has had and will continue to have.”
As distributors grow, their management changes. The smaller companies of the past tended to be family-run operations, but as they grew, management came in from outside the family and outside the lubricants industry – from private equity firms, for example. Some believe this caused a loss of close relationships with consumers as distributor efficiency rose.
“[The acquirers] brought in managers from outside the industry from other areas with a different set of management skills, more on the financial side and logistical side. In the views of some, it moved the dial away from customer intimacy toward efficiency,” Glenn explained. “Now, you’re seeing a more balanced approach, where you don’t trade off customer intimacy for the efficiency – you strike a balance.”
Thanks to consolidation, distributors can handle a greater geographical area and are better able to undertake internal projects to improve their business. In the past, Glenn noted, distributors would handle one or two projects a year; now, many can handle five or even eight projects. “Today, they’ve got the scale to manage multiple projects, they’ve got the scale to handle geographically larger accounts. That’s been a positive change in that they have greater capacity to improve their performance.”
Officials at Pugh, Apollo, Veterans, Halco and Mid-South have declined to describe the exact structure of their operation, but Pugh Senior Vice President Tyson Pugh agreed with Glenn.
“We feel that [consolidation] is necessary to grow the business to continue to be able to provide the best value for our customers and suppliers,” he said in an interview. “Delivering that value requires increasing investment in people, systems and physical infrastructure, and we’re much better positioned to do that as a larger organization.”
The dwindling number of smaller lubricant distributors means that deals will get bigger, and brands will be impacted. “In the past distributors were clearly multi-branded for the most part. Today, you’re looking at these mega-distributors who are very much aligned with one major brand,” Glenn said.
The more casual partnerships of the past are shifting into true partnerships, where lubricant manufacturer-marketer and distributor strategize together and are intimately involved in their combined success. This creates angst for many companies and increasing competition, Glenn said.
For example, if there are two dealers distributing the same brand of lubricant within 200 miles of each other, it’s reasonable to assume that there is some geographical overlap that will likely result in choosing a favorite company as the sole distributor.
“We’re talking about companies that could be looking at having to shift a majority of their business to one major, and that means if they’re not the chosen distributor in that region, they could lose [the major’s] brand. Losing that brand could cost the distributor their business,” Glenn warned.