From major supply chain disruptions to increasingly stringent regulations and notable shifts in consumer demands, the distribution landscape now looks significantly different than it did three or four decades ago. So how have distributors managed to roll with the punches, and in what ways has the distribution landscape evolved?

Consolidation of the Past and Future

Consolidation amongst the United States’ still-large number of lubricant distributors is by no means a new trend in the industry. However, it is one that is predicted to shape the distribution landscape for years to come. 

In the Need to Know column in the May 2023 issue of Lubes’n’Greases, President of Petroleum Trends International Thomas Glenn explained that there was a frenzy of merger and acquisition activity amongst the major oil companies in the 1990s and early 2000s. On the tails of this activity, the majors were forced to pare down “the combined number [of distributors] they were doing business with to minimize channel conflicts, improve efficiency and reduce costs.”

The distributors that were retained by the majors during that period of flux were those that fit the majors’ alignment models, which were largely “based on volume metrics, brand commitments, sub-jobber arrangements and other methods,” Glenn said. 

Knowing that not all of them could make the cut, some distributors chose to increase their competitiveness by joining forces. This led to the conception of companies like PetroLiance, which formed in 2006 when four ExxonMobil distributors—Boncosky Oil, Commercial Ullman Lubricants, Young Oil and Lubricant Technologies—merged. An additional three distributors were tacked onto PetroLiance before it was acquired by distribution giant PetroChoice in 2014. 

Figure 1. Number of Acquisitions, by Company and Year

Some additional factors further accelerated the consolidation trend. Take the Great Recession—which lasted from 2007 through 2009—as an example. The recession weeded out a significant portion of small distributors, who either closed their doors or were forced to sell their businesses during the financial hardship of the period. 

More recently, the industry has waded into what Glenn referred to in his column as the “second phase of consolidation.” This phase is marked by large distributors working with vigor to build scale through acquisitions. Examples of large North American distributors that have been making a notable number of strategic acquisitions during the past few years are RelaDyne, PetroChoice and Parkland, among others. 

Moving into the future, Glenn predicted that the industry is now beginning to usher in a third phase of consolidation in which the number of mergers will begin to slow, but the scale of those mergers will likely increase. To a certain degree, the industry is already seeing this change come to fruition.  

Reliability and Private Labels Unite

If the COVID-19 pandemic-induced supply chain strains taught the lubricants industry anything, it is that reliability of supply always reigns supreme. At various points throughout the past five years, availability of key lubricant components—and consequently finished products, too—experienced some unprecedented disruptions. These disruptions left lubricant industry players—from additive and base oil suppliers to lubricant blenders and distributors—scrambling to figure out how to meet demand.  

Cue the emergence of private label, which stepped into the spotlight when the usual suppliers were unable to deliver the necessary volumes to fill their orders. Despite concerns that unfamiliar private label products might result in damaged equipment and increased downtime, sizable holes in the supply chain forced consumers to make the transition, at least on a temporary basis. 

However, the serendipity of the situation is that consumers quickly realized that most of these private label products met the same performance standards as those from the major brands and were often less expensive. This, of course, made private label brands more attractive and, in a way, mainstream than they had ever been before. And while some customers switched back to their usual products when it was available again, some didn’t. 

Ch-Ch-Ch-Changes

Recent changes in market dynamics have, of course, forced distributors to reconsider which products make the most sense for them to be distributing. For instance, it is no secret that there has been an organic decline in demand for passenger car motor oil over the past few years, and this decline will likely steepen as the world’s car parc is electrified. Because of this rather large-scale shift, many distributors are now looking to other types of products that will enable them to best grow their businesses. 

So which products might present the best growth opportunities for distributors?

Top of mind for many are the various fluids used in electric vehicles. These include coolants, transmission fluids and greases. After all, more EVs on the road are bound to lead to increased demand for applicable fluids. 

A close second, however, might be industrial lubricants. According to a September 20 webinar hosted by Kline & Co., the industrial segment is ripe for the picking and accounted for nearly half of total lubricant demand in North America in 2022. Kline also predicted that the segment will continue to comprise the largest portion of the market up through 2027. 

We’re All in this Together

A certain degree of collaboration between the majors and their distributors is necessary to make their symbiotic relationship work, but it is likely that collaboration between the two will intensify in the coming years. 

“I think there will be increasing collaboration between the majors and their aligned distributors, particularly as it relates to strategic planning,” Glenn said in the January 2024 issue of Lubes’n’Greases. “Although they have been doing this, there will be more reason to build on it moving forward.” 

Why is that? According to Glenn, majors and their channel partners will likely be interested in higher levels of collaboration for a wide range of reasons, including strengthening risk mitigation, growing business in a declining market, lowering operating costs, optimizing the supply chain and meeting carbon neutral initiatives, among other reasons. 

However, it is important to note that the relationship between the majors and their distributors may shift a bit in the favor of distributors in the coming years. As distributors become smaller in number but larger in size, the power balance between majors and distributors will necessarily change. That is to say that distributors will likely have greater leverage to negotiate more favorable agreements because of their larger size and the majors’ increased dependency on the relationship remaining intact. 

(For more in-depth information on the major-distributor power balance, check out Glenn’s Need to Know column in the September 2024 issue of Lubes’n’Greases.)  

Enter Private Equity

Private equity has become increasingly interested in the lubricant distribution space over the past decade or so. According to a white paper published by Raymond James, a global financial services company, the lubricant distribution space is attractive to private equity firms for several reasons, which include the following:

• Lubricant products generally serve large and relatively stable end markets. 
• Lubricant products offer relatively attractive and stable margins. 
• In general, lubricant distributors possess high customer retention as well as regular order patterns. 
• The lubricants industry in the United States is highly fragmented, despite the notable consolidation that has taken place in recent years. 

Some major players in lubricant distribution that have veered down the private equity road include Brenntag, PetroChoice and RelaDyne. As if evidenced by these distributors’ notable merger and acquisition activity over the years, private equity involvement has allowed them to employ a “buy and build” growth strategy. 

For instance, RelaDyne is a significant private equity-backed distributor with big aspirations for growth—both in the domestic and international markets. The powerhouse distributor was acquired by Audax Private Equity in July 2016 from AEA Investors, a private equity group. The company was originally formed by combining four distributors in Ohio, Illinois, Texas and Louisiana. Today, it covers a geographic area spanning the United States but also reaching into other key regions, like Latin America. 

All in all, Raymond James’s white paper concludes that the lubricant distribution segment in the United States “exhibits structural elements conducive to the continued success of private equity in the space.” That is to say that several recent examples have proven that “buy and build” strategies are more than viable, and that success is, at least in part, “driven by the ability of a sponsor to professionalize the business, create a scalable acquisition integration platform and ultimately drive the consolidation of smaller distributors.”  

Sydney Moore is managing editor of Lubes’n’Greases magazine. Contact her at Sydney@LubesnGreases.com