Will the Majors get Back into the Distribution Business?
By Thomas F. Glenn, President
Petroleum Trends International, Inc. – Publishers of JobbersWorld
August 30, 2024
With Phillips 66 acquiring Hunt & Sons in December 2023, and word on the street that another large West Coast fuel and lubricant distributor has joined the fold, many distributors are now wondering if this is the start of a new chapter in the business. In this chapter, some majors return to direct distribution. Adding to the speculation are questions about how private equity will exit the lubricant distribution business.
The questions JobbersWorld has recently been fielding about the possibilities brought me back to a conversation I had nearly 25 years ago with Bill Battersby, the former owner of Mid-Town Petroleum.
Battersby is one of the few people in the world to hold a degree in petroleum distribution. Mid-Town Petroleum was one of the largest lubricant distributors in the mid-west before RelaDyne acquired them in 2010 making them one of four platform companies RelaDyne was built on.
Battersby noted that in the early days of petroleum distribution, the majors owned the warehouses, trucks, and products. In the 1940s and 50s, however, they began exiting lubricant distribution. They did so by selling or practically “giving” their distribution assets to the managers involved in these direct operations. The majors increased reliance on these and other distributors and over time, the number of lubricant distributors in the US grew to thousands.
Primary among the many reasons the majors exited was to reduce operational costs and risks and to focus on their core business activities. Although the majors had warehouses and trucks, it became too costly to support these operations, and they came up short of the expertise and experience necessary to manage the challenges of lubricant distribution logistics. In addition, they lacked the workforce needed to directly serve the highly fragmented and geographically diffuse lubricant customer base.
So rather than continuing to engage in costly business activity that they were not particularly skilled at, they shifted cost and risks to a growing network of distributors.
Before the major mergers in the late 1990s and early 2000s, each major had a network of roughly 300 to 500 distributors.
Battersby noted that while it made good business sense, at that time, for the majors to shift distribution and as much of any other operating cost and risk they could to their distributors, doing so came at a cost. It diminished their control over the distribution network and the majors had to let go of some margin and ownership of the customer relationships.
With distributors also consolidating and growing exponentially, they would be in a stronger position to negotiate more favorable pricing, terms, and buyback rates, grow private label sales, and leverage their strength in other ways. With this shift in power in mind and the likelihood that the largest distributors in the business would be owned by private equity (PE), Battersby predicted that the majors would someday return to direct distribution by acquiring their largest distributors from PE. He added it would be a tempting apple for the majors to bite since it would give them control over distribution and brand representation. It would also provide an opportunity to strengthen customer relationships, gain a direct line of sight to customer needs and trends, and lift their margins by capturing the premiums distributors receive.
So here we are, roughly 25 years after Battersby’s prediction, and distributors are asking if Phillips 66 acquisition in the distribution space is a sign that the fuel and lubricants distribution business is on the brink of yet another significant transformation.
Rather than sharing my views on this subject, I thought connecting with Battersby to hear what he thinks now would be interesting. Taking a few minutes off from skiing some of the best snow on earth and selling lubricants to government agencies around the world in his “retirement,” Battersby says “It comes as no surprise to hear distributors are now expressing concern about majors going back to direct delivery. I still believe they will eventually do it and based on how the industry has transformed, that time may be near.”
Battersby says the business landscape has experienced significant change over the past 25 years. Citing JobbersWorld’s data, he spoke about consolidation and that where Exxon, Mobil, Shell, and Chevron once had hundreds of distributors, ExxonMobil now has roughly 50, and Shell and Chevron each have about 100. Distributors have also become much larger. Again, pointing to JobbersWorld as the source, he said that while large distributors back then were selling a few million gallons of lubricants a year, operated 3 to 4 locations, and generally tried to fly private label sales under the radar of the majors, today, the largest sell close to 70 million gallons, have a national footprint, and boldly promote private label brands. In addition, the business is far more transactional and brand-agnostic than in the past.
Although Phillips 66 acquisitions in the distribution space may not necessarily signal the start of a trend, Battersby says that the changes in the business landscape we have seen increase the probability that some majors are now re-evaluating the costs and benefits of taking distribution inhouse. Some will likely conclude (particularly when looking across their fuel and lubricants business) that doing so will give them desired control over distribution and brand representation, improve efficiency, better align their operations with market demands, strengthen customer relationships, and increase their margins. If and when such conclusions are reached, Battersby quips, the majors will say, “Thank you very much for rolling them up Mr. Banker. You helped reduce the number of distributors we do business with from hundreds across the county to one in every state. Better you than us to spend the time and money needed to consolidate their assets, close deals and integrate acquisitions, consolidate ERP systems, bring in AI and the latest technology, drive down costs, and build strong second-tier brands. We will take it from here. Thanks again for the help. “
Let JobbersWorld know what you think. Will the Majors get Back into the Distribution Business?
Note: This article was written with the consent of Bill Battersby