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Date: March 2014

Company: Avellin Corporation


Executives: Aaron Jonnerson – VP of Marketing for automotive division
Product: Eco7

Problem: What positioning and pricing will work with channel partners and resonate with consumers?

Aaron Jonnerson:

 Worried about the launch


 Confident in new product
 What

Avellin:

 Founded in 1936 in the US as an oil refiner


o Diversified into industrial and specialty chemical manufacturing
o In 1995 divested its petroleum division
 Focused on remaining segments:
 Industrial Materials
 Automotive (largest division – 60% of revenue and 40% of profits)
o PCMO accounted for 65% of revenues, with a Gross Margin of 20-22%
 By 2014 it operated 10 lubricant blending & packaging plants in the US and 7 regional distribution
centers
 Number 3 player in branded motor oils
 Good relations with independent lube stores
o Had a proprietary one called AvellinAuto
 Market share had declined a bit.
o Sluggish growth since 2005
o Eco7 launch is very important as it promises to increase market share
 Jonnerson defines Avellin as a “well respected, innovative company that consumers trust”
 2013 net income was 4% on total revenues of 2.2 Billion

Eco7 Product Features: - You have the green light

 Took 2 years of R&D


 Environmentally friendly motor oil
o Made up of 65% of recycled oil
o Required 45% less energy to be produced
o Consumers valued environmentally friendly options and would pay price premium to be “green”
o Used motor oil (if not discarded properly) could harm water + soil
 80% of discarded oil could be reused
 It could be recycled into new motor oil by refining it
 Green automotive technology
 Offered performance and cost advantages only its only competition, SevoGreen
o Could help grown Avellin’s business in the passanger-car motor oil market
 Expected to strength customer relationship and create new momentum
 Had superior performance, comparable to synthetic blends oil
 Would require change after 7,500 miles
 Performed better at extreme temperatures
 Cost to produce:
o $2.01 per quart
 VS 1.95 and 1.20 for synthetic and conventional, respectively
 Suggested prices:
o 5.25 too low- would squeeze everyone’s margin
 4.5 sales per day
o 6.75 too expensive – competes with favoured synthetic
 3.5 sales per day

Market

 Interest in green automotive technology increases


 Most R&D focused on: improving fuel efficiency, alternative energy sources, reducing emissions
o Little innovation on motor oil used to maintain engines
 Green motor oil market is in infancy in the Passenger-Car Motor Oil Market (PCMO)
 Do-it-yourself market had shrunk. People were seeking professional oil-change services
 Car dealers and mass service outlets grew oil sales
 Fast Lube channel grew, specifically national chains.
o This was a concern for Avellin as they worked mostly with independent fast lube stores
 Mature industry
o 10.5 Billion in 2012, expected annual growth of no more than 2% through 2020

Product

o High quality motor oil could be used for longer time before it broke down
o PCMO broke down intro three categories
 Conventional – most widely used
 From $2.50 to $4.00 per quart, most affordable motor oil
 Synthetic Blend
 From $5.50 to $9.00 per quart
 Offered greater longevity, withstood high temperatures thus required less
changes
 Could be used in any vehicle – preferred for high-performing vehicles that
generated more engine heat
 Accounted for less than 20% of industry sales
 Full synthetic
 From $5.50 to $9.00 per quart
 Most expensive oil
 Offered greater longevity, withstood high temperatures thus required less
changes
 Used petroleum as base material, was then refined and included additives to
boost performance
 Accounted for less than 20% of industry sales

Consumers

 Consumers viewed oil as a commodity product


 Viewed oil changes as nuances that cost time and money
 Mostly price sensitive
o Little price growth expected
 Traditionally (older cars) were adviced to get oil change every 3,000 miles or 3 months
o If not, engine performance reduces and eventually gets damanged
 Newer cards lasted for:
o Conventional up to 5,000 miles
o Synthetic Blend up to 7,500 miles
o Full Synthetic up to 10,000 miles
 Average consumers drove 4,500 miles before getting oil changes, as service providers recommended
getting them frequently
 Market had two categories:
o Do it Yourself
 Changed their own motor oil themselves
 Purchased PCMO bottles from mass merchandisers, convenience stores, automotive
specialty stores, and online
 Younger segment and most likely to live in smaller towns and rural areas
 Consumers were less affluent thus more cost conscious
 Favored trucks and sport utility vehicles
 Tended to know more about vehicles
 Purchased oil in mass merchandisers or automotive parts stores
o Do it for me
 Older segment with more education and higher income
 Lived in large metropolitan area
 Preferred foreign cars and luxury vehicles
 Drive fuel-efficient diesel or hybrid cars
 Used professional service providers for oil changes
 Accounted for 75% of all oil changes
 Most could not explain PCMO product classifications and did not remember what brand
they purchased (low loyalty)

Distribution

o Manufacturers sold directly through wholesale distributors


 25% of sales went to large retail accounts
o For sales to other retail and DIFM Service Outlets manufacturers relied on wholesale distributors
network
 Helped manufacturers maintain strong relationships with local fast lubes, car dealers,
repair shops, specialty stores by providing effective, timely order fulfillment and service
 Most distributors carried few brands thus focusing on products
 They seeked to benefit from bulk purchase discounts and manufacturers
incentives
 DIFM would steer customers to a preferred brand due to discounts/incentives
 AVG Gross Margin was around 55% for branded PCMO and 65% for private
labels
o Branded fast-lube outlet carried specific PCMO brand

Avellin Distribution Channels

 Independent DIFM
o Avelline created the Aventage Program
o Involved sales managers, management, in-store displays, customer education, bulk
discounts
o This provided Avellin with customer behavior and trends data
o Helped them assure service quality was upscale
o Out of their 6,000-independent fast-lube customers, 4,400 were in the Aventage Program
o Also sold to 6,500 oil change-plus stores and repair shops
o Independent DIFM = 68% of sales
 National Retailers
o Only for the DIY segment
o Accounted for 9% of sales
 AvellinAuto
o when opening new stores, they aimed for locations that minimized the impact on existing
customers (looking for new customers)
o Effective manufacturer gross profit was $0.75 higher per five quarts
o Had 436 open
o Generated 7% of PCMO sales
 Remaining Percent
o The remaining revenue share came from national DIFM chains, car dealers, convenience
stores, and online sales
 Avellin avoided cannibalizing their own products and sales to try and not exuberate current prices

PCMO Service Providers

 Fast Lubes (Quick Lubes)


o Offered alternative services aside from oil changes, and offer quick oil changes that are
completed in about 30 minutes. The largest chains are owned and branded by the largest PCMO
manufacturers (30% of 17,000 fast lube outlets)
o An outlet could:
 Perform1,200 changes per month
 Generate $650,000 to $700,000 in annual sales
 Helped customers shift from DIY to DIFM
 Prices were 15-20% higher than at repair shops, delaers, and mass merchansiers
 Oil Change Plus
o Specialty stores focused on a specific product or service (tires, mufflers, brakes, etc.)
o These offered oil changes to attract more customers and conduct cross-sales
o Avg store performed 40-50% of the number of oil changes VS a fast-lube outlet
 About 600 per month
 Repair Shops
o Small and independent outlets that offer mechanic services and sometimes tire changes nad gas
sales
o Share dropped in favor of lower-cost, higher-volume outlets
 Car Dealers
o Provided after-sales services as part of vehicle warranty
o Since vehicle quality improved, repaire revenues declined
o Started to offer routine maintenance services, such as oil changes, to reach a higher input
o Known as a one-stop shop
 Mass Merchandisers & Warehouse Clubs
o Large format retail chains that offered automotive care products for DIY customers and some
provided basic auto services for DIFM segment
o Prices were competitive thus producing very small benefit for the retailer
o Offered the benefit where customers could shop while they waited for their service to conclude

Competition

 Sevoline
o Ranked 5th in the market
o Only competitors to introduce motor oil called SevoGreen
 Introduced in 2011
 Manufactured by recycled oils
 Cost twice as much as regular oils ($7.50 per quart)
 Sold to the DIFM channel mostly
 Introduction generated buzz in the industry
 Sales penetration showed promise
 Few customers were motivated or trained to promote SevoGreent – sales could be
better
 Didn’t invest a lot in marketing campaigns
 Baud
o Had almost 2,000 stores that only sold its product
 Largest fast-lube chain
o Strong presence in mass merchandisers and clubs
 Preferred brand at Walmart
o Stronger in the DIY and DIFM segment that wanted quality products
 Motoline
o Had 1,200 stores
o Long term relationships with mufflers, brakes and tire chains
 Avelline
o Preferred by independent fast-lube stores, oil change plus stores and repair shops
o Top in segment that seek best price
o Worked hard to provide best service and promotional programs to wholesale distributors and
customers
 Market Leaders for PCMO were Baud (23% of branded sales) and Motoline (15% of branded sales),
followed by Avellin (11% of branded sales)
 Private-label motor oil accounted for 18% of market shares
o Grows steadily
 For DIFM installers, private label motor oil offered discounts, thus generating higher gross margins
o Consumers were easy to up-sell from traditional motor oil to private-label synthetic
 Motoline was the only top-3 company to enter the private-label market
 40% of consumers were undecided about the brand for their next oil change
 Brand Loyalty
o DIY
 More likely to research characteristics, performance and benefits of the brand
 Loyalty was high
 Based on brand trust and familiarity with product
o DIFM
 Convenience of installer location and speed were crucial (service quality)
 Due to this, Baud and Motoline invested in expanding their fast-lube chains in
early 1990’s
o Resulting in them being the easy/obvious choise for cosumers
 More open to professional suggestions (83%)
 And 56% only seeked a specific PCMO product