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Eco 7: Launching a New Motor Oil ADV 388K Integrated Communication Management Group 6

Zachary Bodner (bodnerzd) Alex Hart (amh6375) Xing Liu (xl5525) Darya Procopovich (dp28353) Emma Szyller (es34345) The University of Texas at Austin

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Situation Analysis Demographic Environment The Do-It-Yourself (DIY) consumer segment is younger overall than the Do-It-For-Me (DIFM) consumer segment and is more likely to live in smaller towns or rural areas. On average, DIY consumers are slightly less affluent, favor trucks and SUV’s, and are more conscious when it comes to automotive maintenance. They are more 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 also tend to know more about their vehicles and have a better understanding of the differences between motor oils. The Do-It-For-Me (DIFM) consumer segment is usually older, has more education and a higher income, and is more likely to live in a large metropolitan area. They tend to prefer foreign cars and luxury vehicles, and are more likely to drive fuel-efficient diesel or hybrid cars. They are less likely than DIY consumers to do any maintenance on vehicles themselves. They typically rely on professionals for routine maintenance such as tire rotations, brake service, and tune-ups. Additionally, most DIFM customers cannot explain the product classification and don’t remember what brand of motor oil they last purchased. DIY consumer segment

DIFM consumer segment

Age

Younger

Older

Geography

Smaller towns or rural areas

Large metropolitan areas

Income

Less affluent

Higher income

Education

Less

More

Type of car

Trucks and SUV’s

Foreign, luxury cars, and fuelefficient diesel or hybrid cars.

Motor oil purchase location

Mass merchandiser (Walmart) or automotive parts stores (AutoZone)

Rely on professional for routine maintenance

Overall, most consumers are price sensitive and despite the fact that it is recommended that regular drivers get an oil change every 3,000 miles or three months (whichever comes first), customers typically only change their oil every 4,500 miles.

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Economic Environment The market for PCMO manufacturers in the U.S., excluding service revenues, is approximately $10.5 billion in 2012. The industry is mature, and analysts expect annual growth of no more than 2% through 2020. Manufacturers sell PCMO directly (25% of industry sales) and through wholesale distributors (75% of industry sales). Natural Environment Used motor oil will harm soil and water if not disposed of properly. However, when managed properly, used motor oil can be refined and reused. For instance, Eco7 is an environmentally friendly motor oil because it is made of 65% recycled oil and 45% less energy than is typically used to produce conventional oil. Technological Environment Overall, the performance of a PCMO is gauged by how well it provides lubrication under different conditions. PCMO’s come in three basic categories: conventional, full synthetic, and synthetic blend. Conventional motor oil meets performance specifications and costs less than other types. Full synthetic motor oil uses petroleum as its base material, but is further refined and modified and has more additives to boost performance. Synthetics offer greater longevity and withstand high temperatures more effectively than conventional motor oils. They can be used in any vehicle, but are often specified for higher performance vehicles that generate more engine heat. Competitive Environment The PCMO industry is mature, and the market leaders are Baud and Motoline. Aveline ranks third among PCMO manufacturers. However, although Avellin remains the number three player in branded motor oil, its market share had fallen slightly, making Eco7 an important product launch. Baud and Motoline have invested heavily in expanding their fast-lube chains. The two market leaders have made themselves the easy, obvious choice for consumers in the most attractive metropolitan markets. Baud has the largest fast-lube chain in the country. Baud also enjoys a strong presence in mass merchandisers and clubs, where it is the preferred brand for oil changes at Walmart and is granted significant shelf space, which helps it capture DIY sales. Motoline has more than 1,200 stores in its fast-lube chain and long-term relationships with major chains for brakes and mufflers, as well as national tire dealers. To date, only Sevoline, a competitor to Avellin and ranked 5th in the market, has introduced a ‘green’ motor oil, SevoGreen, which was introduced in 2011. Like Eco7, SevoGreen is manufactured with recycled motor oil. It performs on par with other conventional oils, although, at $7.50 per quart, it costs nearly twice as much. Sevogreen has generated significant buzz within the industry and initial sales penetration of channel partners has shown promise, but the green motor oil market is clearly in its infancy.

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Despite the fact that Eco7 is a “green” motor oil, it still has to compete with other “regular” motor oils (conventional, full synthetic and synthetic blend). One of the advantages is that although Eco7 is a conventional motor oil, it also has the same characteristics as a synthetic blend. However, Eco7 will be priced higher than conventional oils. It is also important to note that customers are rarely loyal to PMCO brands, and private-label motor oils have lower prices while also generating high gross margins for DIFM installers. Taken together, this leads to private-label motor oils having 32% of the market share, which continues to increase. Product Environment Many consumers view motor oil as a commodity product (pg. 1). That being said, consumer interest in “green” automobile technology, such as hybrids and electric vehicles, has still increased steadily. Most research and development focuses on improving fuel efficiency, alternative energy sources, and reducing emissions. However, there has been little innovation in the motor oil used to maintain engines. The most widely used products are those within the conventional motor oil category, because they meet performance specifications and, at $2.50 to $4.00 per quart, they are the most affordable motor oil. Synthetic motor oil accounts for less than 20% of industry sales because of its high price point ($5.50 to $9.00 per quart), despite the fact that is has greater longevity and can withstand high temperatures more effectively. Company Analysis Avellin has experienced sluggish growth since 2005. This is partly due to a takeover bid that Avellin was forced to fight in 2007. While the resulting management buyout kept Avellin independent, the whole ordeal saddled the company with significant debt and interest payments. In 2013, Avellin’s net income was only 4% of total industry revenues of $2.2 billion. In 2014, Avellin operated ten lubricant blending and packaging plants in the U.S. and seven regional distribution centers. Like its competitors, Avellin has its own fast-lube chain, AvellinAuto. However, Avellin cannot aggressively advertise its motor oil through AvellinAuto because it competes with the company’s other DIFM customers. Overall, Avellin has two divisions: Industrial Materials and Automotive. Approximately 60% of Avellin’s revenues and 40% of its profit come from the automotive division. And although Avellin remains the number 3 player in branded motor oil, its market share has fallen slightly, making Eco7 an important product launch.

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SWOT Analysis Strengths

Weaknesses

Competition ● Avellin remains the number 3 player in branded motor oil. ● Avellin is the leading PCMO brand among independent DIFM customers (pg.6) ● Avellin remains a well-respected, innovative company that consumers trust (pg.1) ● Approximately 60% of Avellin’s revenues, and 40% of its profits come from the automotive division; making this product launch a key move in the company’s ability to grow. ● Jonnerson believes that Eco7 offers performance and cost advantages over SevoGreen and can help grow Avellin’s business in the passengercar motor oil (PCMO) market (pg. 1) ● Avellin has historically been favored by independent fast-lube stores, oil change-plus stores, and repair shops (pg.5)

Company ● Avellin’s market share has fallen slightly (pg.1) ● Avellin has experienced sluggish growth since 2005. ● Avellin is saddled with significant debt and interest payments. ● In 2013, Avellin’s net income was only 4% on total industry revenues of $2.2 billion.

Technology ● Eco7 is an environmentally friendly motor oil. ● Avellin’s refining process and additives give Eco7 a longevity and performance comparable to a synthetic blend, making it superior to conventional oil (pg.7) ● Eco7 is made of 65% recycled oil and uses 45% less energy than is typically used to produce conventional oil (pg. 7)

Avellin Programs & Stores ● Avellin has been less aggressive than its competitors in expanding its fastlube chain (pg.6)

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Avellin Programs & Stores ● Avellin’s Aventage program provides customers with dedicated sales managers, management of in-store displays, provision of consumer education and support, and bulk discounts (pg.6) ● AvellinAuto stores are serviced directly through the company’s regional distribution centers, rather than through wholesalers, and the effective manufacturer's gross profit is about $0.75 higher per five quarts (pg.6) Opportunities

Threats

Market ● The market for PCMO manufacturers in the United States, excluding service revenues, was approximately $10.5 billion in 2012 (pg.1)

Market ● The industry of PCMO is mature, and analysts expect annual growth of no more than 2% through 2020 (pg. 2) ● The “fast-lube” channel - comprised of service outlets focused on quick oil changes - has peaked. This is a concern for Avellin, who has a strong customer base among independent fast-lube stores. Only the national fast-lube chains have seen meaningful revenue growth. ● Oil changes in mass merchandisers and clubs are priced very competitively and generate little profit for the retailers, but drive customers to these stores (pg.4) ● Repair shops’ share of automotive maintenance services has declined in favor of lower-cost, higher-volume outlets (pg.4)

Competition ● There is only one competitor (Sevoline) that produces a recycled oil. Consumer Insights ● Most vehicle owners understand the importance of regular oil changes and know the leading PCMO brands. ● Customers appreciate having a “onestop shop” for all maintenance, such as oil changes (pg.4) ● 83% of consumers are willing to accept a professional installer’s recommended PCMO brand if it meets their price expectations and the vehicle manufacturer’s requirements.

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Technology ● There has been little innovation in the motor oil used to maintain engines. ● The green motor oil market is still in its infancy, thus there is a large opportunity for significant growth. ● SevoGreen performs on par with other conventional oils, although at $7.50 per quart, it costs nearly twice as much as current conventional oil options (pg. 7), and would cost a dollar more than the highest proposed price option for Eco7. Environment/Green Technologies ● Surveys indicate that an increasing number of consumers value environmentally friendly options and would pay a premium to be green (pg.6) ● Consumer interest in “green” automobile technology, such as hybrids or electric vehicles, has increased steadily (pg. 1) DIY ● During the past decade, the DIY segment has shrunk dramatically as more customers are beginning to use professional oil-change services (pg.1) ● Sales to DIY consumers are modest, as Sevoline invests little in national marketing campaigns that could build awareness (pg.7) DIFM ● Most distributors and independent DIFM outlets only carry a few brands, thus if Eco7 can find a way into these

Consumer Insights ● Consumers are not excited by motor oil, and building momentum for Eco7 will be difficult. ● Most PCMO consumers view oil changes as a nuisance that costs them time and money (pg.3) ● Many consumers view motor oil as a commodity product (pg. 1) ● Some customers may not understand that Eco7 is not only an environmentally friendly product, but also provides better driving performance (pg.7) ● Aventage customers have begun to demand their own private-label product that can give them good margins and a low price to compete against the lowcost oil changes at mass merchandisers and clubs (pg.6) Technology ● Most innovations offer only modest improvements to existing products and typically are unnoticed by consumers (pg. 2) ● New cars can be driven much farther before requiring an oil change; in 2013, the average consumer drove nearly 4,500 miles before getting an oil change (up from the traditionally recommended 3,000 miles between oil changes). DIY ● A consumer might be unwilling to pay full price for a branded synthetic, but could be upsold from conventional motor oil to a private-label synthetic oil.

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outlets, they will have prime territory because of the lack of competition within each individual outlet. ● DIFM service providers will steer their customers to a preferred brand; if Avellin can convince service providers that Eco7 is a superior option, then it should follow that they will recommend it to customers. ● One-third of Sevoline’s DIFM customers have agreed to carry SevoGreen, but few are motivated or trained to promote it (pg.7); thus Avellin can try to gain market share in the green motor oil segment by resolving this issue and teaching DIFM customers of the superior qualities of Eco7.

● Nearly 70% of DIY consumers report purchasing one PCMO product consistently because of trust and familiarity with the brand. DIFM ● Most DIFM consumers could not explain the product classifications and could not recall what brand of motor oil they had last purchased. ● For the DIFM installers, private label offers lower prices while generating high gross margins (pg.5) ● Major retailers that offered DIFM services, such as Walmart, usually promoted their own private label, Baud, or Motoline (pg.6) Price ● The price of an oil change at a fastlube outlet is 15%-20% higher than it is at repair shops, dealers, and mass merchandisers. (pg.4) ● The varying retail prices of Eco7 at different store locations can create complaints about lower price at other stores (pg.8)

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Problem Statement What distribution channel and pricing strategy should Avellin choose for launching its new “green” motor oil?

Critical Factors 1. Distribution channels - the company has three key distribution channels through which it sells its products to different types of customers. Each channel provides Avellin and it’s retailers with different margins, which are important to consider when analyzing the feasibility of each solution. 2. Price - customers are sensitive to a price, and the company has more price-focused consumers than quality-focused consumers. 3. Competition - Avellin’s Eco7 will compete not only with other “green” oils such as Sevoline, but also with other types of oils (conventional, synthetic and blend synthetic). 4. Target audience - do-it-yourself (DIY) and do-it-for-me (DIFM) are two disparate segments. The DIY segment is younger and more likely to live in smaller towns or rural areas, and more loyal to their brand of choice. The DIFM consumers are older, and have higher income, however they are less brand loyal. 5. Market trends - An increasing number of consumers value environmentally friendly options and will pay a premium for products that align with the idea of being greener. Eco7 is a product that Avellin is pushing to be more environmentally friendly. 6. Product - Eco7 is made of 65% recycled oil, and requires 45% less energy than is typically needed when producing conventional PCMO. In addition, the product provides a longevity and performance level comparable to a synthetic blend of oil, making it superior to conventional oil on a number of fronts.

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Solution 1: Distribution through the independent DIFM customer base and AvellinAuto stores This solution includes offering Eco7 exclusively through the independent DIFM customer base and AvellinAuto stores while keeping it out of the national mass merchandisers, clubs, and major auto-parts chains. Distribution channels Independent DIFM Independent DIFM customers are the key feature in Avellin’s distribution channels, and they bring 68% of the company’s revenue. More than 70% of them join the Aventage loyalty program. Fast lubes, oil change-plus stores and repair stores generate 53% of DIFM purchases (pg. 9, Exhibit 1; combined Fast lube - 32%, Oil change-plus - 12% and Repair shop - 9%), and by selling Eco7 through a wide chain of distributors, the company will reach more final customers and will have higher revenue (Appendix A). Moreover, the fast-lube model helps to drive the consumer shift from DIY to DIFM, often being the first place DIY customers choose among other DIFM installers. Avellin might attract new customers of the growing DIFM segment by offering Eco7 in these stores. AvellinAuto stores With 436 stores open as of 2014, the AvellinAuto chain generated approximately 7% of PMCO sales. Due to the fact that they are serviced directly through the company’s regional distribution centers, AvellinAuto stores bring higher gross profit than DIFM, who are serviced through wholesalers. The result is an additional $0.75 per five quarts. Penetration of Eco7 will be 100% through these stores, but the company still has to be careful and perform less aggressively due to fear of competing with other DIFM chains. Pricing strategy Because the market is sensitive to price, and 17% of Avellin’s consumers are priceoriented, penetration and sales performance of the new motor oil is dependant on price point. The company estimated different levels of adoption and number of sales for each type of distributor (pg. 11, exhibit 6). Also, because Eco7 is a conventional motor oil, it is estimated that consumers of this type of oil would be the first to switch. By choosing to price Eco 7 at $6.75 per quart, the company would have a fewer number of oil changes and lower level of penetration, than it would have by pricing Eco7 at $5.50. Also a lower price might provide independent DIFM customers with a higher margin. Because of these facts, monthly revenue of selling Eco7 at $5.50 is predicted to be $21.8M versus $18.2M selling it at $6.75 (Appendix A). However, these customers would be upsold from Avellin’s conventional motor oil, and the company would sell less conventional oil. The difference in Avellin's revenue selling Eco7

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instead of Avellin Conventional would be higher for $6.75 despite lower number of changes and lower level of adoption. Target audience The DIFM consumer segment who typically use professional service providers to assist in the routine maintenance of their vehicles. Overall, these customers are more affluent and have less interest in the specifics of their car maintenance routines. Moreover, the typical DIFM consumer is more likely to drive fuel-efficient diesel or hybrid cars and thus may be more interested in paying a higher price to receive an environmentally friendly motor oil alternative. Competition Compete with large national brands: Baud and Motoline. In addition, they would compete with the first major “green” motor oil manufacturer, Sevoline, because both companies have similar product offerings and positioning strategies. Pros: ● Avellin is the leading PCMO brand among independent DIFM customers (pg.6). ● Wider chain of distributors compared to only AvellinAuto stores and Aventage loyalty program (Solution 2). ● Independent DIFM bring 68% of revenue, and ignoring them would prevent Avellin from reaching a significant p...