Eco7 Motor Oil Case Study

1. What is the consumer behavior pattern in terms of purchase of Motor Oil?
2. What is Avellin’s current position in the PCMO industry? Elaborate deeply on the consumer perceptions of Avellin as well as the channel strategy used by them.
3. What strategic role does Eco7 Play for Avellin? What expectations should Avellin have from the customer in terms of willingness to purchase a green oil?
4. What should be the Go-To-Market Strategy for Avellin? Highlight especially the pricing decisions and the channel decisions and the implication each will have on the other.

HBS Professor John Quelch and writer Sunru Yong prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. Copyright © 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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Eco7: Launching a New Motor Oil

In March 2014, Aaron Jonnerson, vice president of marketing for the automotive division of Avellin Corporation, was planning the launch of Eco7, a new environmentally friendly motor oil. Consumer interest in “green” automobile technology, such as hybrids or electric vehicles, had increased steadily. Most research and development focused on improving fuel efficiency, alternative energy sources, or reducing emissions. There had been little innovation in the motor oil used to maintain engines. Only Sevoline, a competitor to Avellin, had introduced a motor oil, SevoGreen, which was manufactured from recycled oils. It had generated significant buzz within the industry and initial sales penetration of channel partners had shown promise, but the green motor oil market was clearly in its infancy.

Jonnerson believed that Eco7 offered performance and cost advantages over SevoGreen and could help grow Avellin’s business in the passenger-car motor oil (PCMO) market. During the past decade, the “do-it-yourself” segment had shrunk dramatically as more consumers began to use professional oil-change services. Many consumers viewed motor oil as a commodity product. Car dealers and mass merchandisers had also grown their share of sales. In contrast, the “fast-lube” channel—comprising service outlets focused on quick oil changes—had peaked. This was of concern to Avellin, which had a strong customer base among independent fast-lube stores. Only the national fast-lube chains, most of which were affiliated with motor oil manufacturers, had seen meaningful revenue growth.

Although Avellin remained the number three player in branded motor oil, its market share had fallen slightly, making Eco7 an important product launch. As he presented the product concept to the board, Jonnerson, knowing the career implication of this launch, spoke confidently of Eco7’s prospects: “Despite recent challenges in the motor oil market, Avellin remains a well-respected, innovative company that consumers trust. We have a great platform to launch a new product, and Eco7 is a tremendous offering that is expected to result in profitable growth. This innovation will strengthen our customer relationships and create new momentum in our motor oil business.”

Avellin had experienced sluggish growth since 2005. It had fought a takeover bid in 2007 by SinoPLT, a foreign oil and gas company. The resulting management buyout kept Avellin independent, but had saddled it with significant debt and interest payments. In 2013, Avellin’s net income was only 4% on total revenues of $2.2 billion.

 

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This document is authorized for use only in Aravind Panicker’s Bachelor in Business Administration – 8.30.2020 at Ahmedabad University from Aug 2020 to Jan 2021.

 

 

916-507 | Eco7: Launching a New Motor Oil

2 BRIEFCASES | HARVARD BUSINESS SCHOOL

PCMO was a significant part of Avellin’s business, so expectations were high for Eco7. Despite his confident message to the board, Jonnerson worried about the launch: “Consumers are not excited by motor oil, and building momentum for Eco7 will be difficult. What positioning and pricing will work with channel partners and resonate with consumers?”

Company Background

Founded in the United States in 1936 as an oil refiner, Avellin had diversified into industrial and specialty chemicals manufacturing. In 1995, Avellin divested its petroleum division, exiting the lower- margin business of refining and marketing fuels, within which it lacked the scale to compete with its large, integrated competitors. Avellin then focused on its remaining divisions: Industrial Materials, which sold resins and adhesive technologies, and Automotive, which sold lubricants and other automotive care products to commercial and consumer markets. Approximately 60% of Avellin’s revenues and 40% of its profits came from the automotive division.

In 2014, Avellin operated ten lubricant blending and packaging plants in the United States and seven regional distribution centers. Like its competitors, Avellin had its own fast-lube chain, AvellinAuto. Within the automotive division, PCMO accounted for nearly 65% of revenues, with gross margins of 20% to 22%. The remaining revenues came from motor oil sales to commercial fleet managers (e.g., trucking companies) and other automotive chemicals, such as brake fluid and coolants.

The Market for Passenger Car Motor Oil

Motor oil is used to lubricate internal combustion engines in automobiles, reducing the wear on moving parts and cooling the engine by carrying heat away. The market for PCMO manufacturers in the United States, excluding service revenues, was approximately $10.5 billion in 2012. Key drivers of the market included car sales, mileage, and frequency of maintenance. The industry was mature, and analysts expected annual growth of no more than 2% through 2020.

The performance of a PCMO was gauged by how well it provided lubrication under different conditions, including low temperatures when the engine was first started and very high temperatures as the vehicle was running. A higher quality lubricant could be used longer before it broke down and needed to be replaced. PCMOs came in three basic categories: conventional, full synthetic, and synthetic blend. Of these, the most widely used was conventional motor oil. It met performance specifications and, at $2.50 to $4.00 per quart, was the most affordable motor oil. Full synthetic motor oil also used petroleum as its base material, but was further refined and modified and had more additives to boost performance.

Synthetics offered greater longevity and withstood high temperatures more effectively than did conventional oil. They could be used in any vehicle, but were often specified for higher performance vehicles that generated more engine heat. Proponents of synthetic oil argued that its higher price (from $5.50 to $9.00 per quart) was offset by the oil’s longevity, which allowed consumers to change oil less frequently. Even so, synthetic oils accounted for less than 20% of industry sales because of their high price point. Synthetic blends offered moderately better performance at a slightly higher cost. Leading manufacturers invested in continued product development, but most innovations offered only modest improvements to existing products and typically went unnoticed by consumers.

This document is authorized for use only in Aravind Panicker’s Bachelor in Business Administration – 8.30.2020 at Ahmedabad University from Aug 2020 to Jan 2021.

 

 

Eco7: Launching a New Motor Oil | 916-507

HARVARD BUSINESS SCHOOL | BRIEFCASES 3

PCMO Consumers

Most PCMO consumers viewed oil changes as a nuisance that cost them time and money. In addition, most of them were price sensitive, and very little price growth was expected for either PCMO manufacturers or oil change providers. Traditionally, car owners were advised to get an oil change every 3,000 miles or three months, whichever came first. Delaying an oil change for too long would reduce a car’s performance and eventually lead to engine damage. As engine design and motor oils had improved, oil changes were required less frequently. Automotive manufacturers’ guidelines varied by vehicle, but newer cars could be driven much farther before requiring an oil change: typically 5,000 miles with conventional oil, over 7,500 miles with some synthetic blends, and over 10,000 miles with the highest performing full synthetics. Service providers had no incentive to encourage infrequent changes, however, and most continued to recommend more frequent oil changes than automobile manufacturers deemed necessary. In 2013, the average consumer drove nearly 4,500 miles before getting an oil change.

Consumers of motor oil fell into two broad segments: do-it-yourself (DIY) and do-it-for-me (DIFM). The DIY segment comprised consumers who changed their own motor oil. These consumers purchased PCMO in bottles from mass merchandisers, convenience stores, automotive specialty stores, or online. In contrast, the DIFM consumer segment used professional service providers. Through the 1980s, PCMO was predominantly a DIY market in the United States. The growth of low-cost DIFM options, however, as well as changing consumer demographics and behavior, had led to a shift away from DIY. In 2000, the split between DIY and DIFM was approximately 50/50. DIFM accounted for 75% of all oil changes.

The DIY segment was younger overall than the DIFM segment and more likely to live in smaller towns or rural areas. On average, DIY consumers were slightly less affluent, favored trucks and sports utility vehicles, and were more cost-conscious when it came to automotive maintenance. They were most likely to purchase their motor oil from a mass merchandiser, such as Walmart, or an automotive parts store, such as AutoZone or Advance Auto Parts. They tended to know more about their vehicles and had a better understanding of the differences between motor oils.

The typical DIFM consumer was usually older, had more education and a higher income, and was more likely to live in a large metropolitan area. DIFM consumers tended to prefer foreign cars and luxury vehicles, and were more likely to drive fuel-efficient diesel or hybrid cars. They were less likely than DIY consumers were to do any maintenance on vehicles. DIFM consumers also relied on professionals for routine maintenance such as tire rotations, brake service, and tune-ups.

Surveys indicated that most vehicle owners understood the importance of regular oil changes and knew the leading PCMO brands. Most DIFM consumers, however, could not explain the product classifications (conventional, full synthetic, and synthetic blend) and could not recall what brand of motor oil they had last purchased. One fast-lube operator commented, “Our customers are just happy to know they’re doing an oil change on time. Most of them don’t worry much about the details.”

PCMO Distribution

PCMO manufacturers sold products directly and through wholesale distributors. Approximately 25% of industry sales went directly to large retail accounts, such as the national tire dealer chains and mass merchandisers. For sales to other retail and DIFM service outlets, manufacturers relied on a network of wholesale distributors, which helped manufacturers by maintaining strong relationships with local fast lubes, car dealers, repair shops, and specialty stores and by providing effective, timely

This document is authorized for use only in Aravind Panicker’s Bachelor in Business Administration – 8.30.2020 at Ahmedabad University from Aug 2020 to Jan 2021.

 

 

916-507 | Eco7: Launching a New Motor Oil

4 BRIEFCASES | HARVARD BUSINESS SCHOOL

order fulfillment and service. While distributors were usually not exclusively bound to a single PCMO brand, most carried only a few brands. This focus allowed them to benefit from exclusive sales territories, volume discounts, and incentive programs that manufacturers offered.

Branded fast-lube outlets were affiliated with a specific PCMO brand and offered this brand exclusively. Independent DIFM outlets, like wholesale distributors, usually offered a limited number of brands or focused on private label in order to benefit from bulk purchase discounts and manufacturer incentives. The DIFM service provider would then steer its customers to a preferred brand. When the installer purchased in bulk, the average gross margin on oil changes—excluding labor and overhead—was approximately 55% for branded PCMO and 65% for private label.

PCMO Service Providers

DIFM consumers could choose from five types of service providers:

Fast lubes. Also known as “quick lubes,” these outlets offered few other services besides oil changes. As the name suggested, the value proposition was the speed with which the oil change service could be completed—often in just thirty minutes. The largest national fast-lube chains were owned and branded by the major PMCO manufacturers; these accounted for approximately 30% of the 17,000 fast- lube outlets in the U.S. and had enjoyed nearly all the growth in this distribution channel over the last decade. A typical fast-lube outlet performed 1,200 oil changes per month and generated $650,000 to $700,000 in annual sales. Customers using fast lubes cared most about the convenience of the location, the speed of the service, and the professionalism of the installer.

Oil change-plus. “Oil change–plus” outlets were usually specialty stores focused primarily on a specific product or service, such as tires, mufflers, or brakes, rather than on motor oil. Typically, to attract more customers and maximize capacity utilization, they also offered oil-change services or tire rotations, which vehicle owners required more frequently than other services. The average oil change–plus store performed 40% to 50% the number of oil changes provided by an average fast-lube outlet.

Repair shops. These were typically small, independent outlets offering auto mechanic services and sometimes tire changes or gasoline sales. Their share of automotive maintenance services had declined in favor of lower-cost, higher-volume outlets.

Car dealers. Car dealers focused on the sale or lease of vehicles and usually provided after-sales service, particularly as part of the vehicle warranty. Dealers already provided predetermined maintenance checks as recommended by the vehicle manufacturer and had the diagnostic equipment specific to a given make and model. Because vehicle quality had improved and repair revenues had declined, dealers had become more likely to promote their services for routine maintenance, such as oil changes. For their part, customers appreciated having a “one-stop shop” for all maintenance and knew that the oil change would be done in strict accordance with the manufacturer recommendation.

Mass merchandisers and warehouse clubs. Mass merchandisers and clubs were large-format retail chains that sold clothing, household goods, food, and electronics. Most offered automotive care products for DIY consumers and also provided basic auto services for the DIFM segment. DIFM oil changes were priced very competitively and generated little profit for the retailers, but drove customers to these stores, where they could shop while they waited for the service to be completed.

 
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