Strategic advisory for the Global Lubricants industry | A Conversation on Growth (Part I)
Strategic advisory for the Global Lubricants industry
Global Lubricants consultants, Global Energy consultants, Management consultants, Downstream energy consultants, Downstream petroleum consultants, Lubricants strategy, Lubricants business, Lubricants M&A, Competitive benchmarking, Financial benchmarking, Financial advisory, Transaction Advisory, Business models, Marketing models, Distribution models, Performance management, Supply chain optimization, Transformation, Marketing, Distribution, Sales
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A Conversation on Growth (Part I)

By Suzan M. Jagger for Lube Magazine.


Gauging the Future…

As we launch into our business plans for 2016, how can we best communicate the value of the lubricants business to our Board members, the financial community, and the rest of the energy industry? If we follow the pace of volume growth as a commodity refiner or chemicals producer would tend to measure, the outlook does not generate shouts of joy. In the past 15 years we have only registered a total growth of 4% as gains in Asia Pacific have been offset by declines in Europe and parts of the Americas, as well as the impact of two global economic recessions. Going forward our models signal an annual average growth of about 2% over the next decade… let’s call it flat.


Following the Money Trail…

The picture is quite different. During this same period, the collective value in margin terms as generated by the fully integrated business has grown 2.5 times to a total $65 billion in Gross Margin. The largest group of beneficiaries has been the branded marketers who have managed to generate 43% or $28 billion of the GM pool by offsetting volume declines in home-based and mature markets with earnings growth. This includes Multinational oil, National oil, and Independent marketers. Trade participants in the retail Do-It-Yourself and strength in Do-It-For-Me channels such as OEM dealership workshops, independent workshops, and quick lubes have also been riding the upward trajectory of value.

Managing competitive pricing in a highly volatile base oil cost environment has generated leading profits.


The Financial Magic…

It comes from three big sources. By far the largest source has been the discipline learned by marketers to maintain product margins as base oil prices escalated from about $300 per ton in 2000 to a peak of about $1,000 per ton in 2011, and then capturing the margin tailwinds as base oil declined thereafter. Managing competitive pricing in a highly volatile base oil cost environment has generated leading profits. Another important source is the up-trading of product portfolios to higher margin branded synthetics and premium products. And lastly, as volume growth has shifted regionally, marketers have had to persistently re-align their business footprint of supply chain, route-to-market, and investments in marketing and technology to keep operating costs in-check. The expanding use of digital marketing and social media is also contributing to lower costs.

Overall progress is reflected in key financial indicators such as the advancement of industry average Return-on-Capital Employed (ROCE), reflecting improved capital efficiency, and the weighted average gross margin for all global marketers that increased from about 30 cents per litre in 2000, to almost 80 cents per litre today. Not all competitors have benefited equally, and even the market leaders are continuously making adjustments to extract value.

Jagger Advisory’s financial models project that over the next 5 years marketers will add another $7.6 billion to their GM pool balanced between automotive and industrial businesses. Marketers and Trade participants will continue to outpace others, and the moderation of growth in China and pull-back in Brazil and Russia certainly means that in the near term we need to focus more on the rateability of earnings that is more achievable in our core North American and some European markets. Nevertheless, 60% of new value will still come from Asia Pacific and selected areas of the Middle East. The Americas contribute 24%, followed by Europe and Africa with only 16% as margin gains from quality up-trading are being offset by declining or stagnant volume.


Lube Magazine
February 2016, No. 131