Eco7 motor Oil Case Study

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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.

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J O H N Q U E L C H

S U N R U Y O N G

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.

9 – 9 1 6 – 5 0 7
S E P T E M B E R 1 5 , 2 0 1 5

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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.

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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

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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.

The fast-lube model had helped to drive the consumer shift from DIY to DIFM. The price of an oil
change at a fast-lube outlet was, however, 15% to 20% higher than it was at repair shops, dealers, and
mass merchandisers. Other DIFM channels had begun to recognize and promote oil changes as an

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upselling and relationship-building opportunity (see Exhibit 1 for share of DIFM purchases by
channel).

Competitive Landscape

In the U.S., the market leaders for PCMO were Baud and Motoline, which accounted for 23% and
15%, respectively, of branded sales in 2012. Avellin ranked third among PCMO manufacturers with
11% of the market (see Exhibit 2 for PCMO brand share data). Sales of private-label motor oil, which
accounted for only 18% of market share in 2000, had grown steadily as consumers perceived fewer
differences among PCMO brands. Mass merchandisers, warehouse clubs, and convenience stores led
the push toward private-label PCMO. For the DIFM installers, private label offered lower prices while
generating high gross margins. A consumer might be unwilling to pay full price for a branded
synthetic, but could be upsold from conventional motor oil to private-label synthetic oil. Due to the
favorable margins for private label, some wholesale distributors promoted such off-brand motor oils
aggressively to DIFM outlets and retailers. Of the three leading PCMO companies, only Motoline had
entered the private-label market, where it sold to national accounts and large wholesale distributors.

Consumer brand loyalty differed between the DIY and DIFM segments. The DIY segment was more
likely to research the characteristics and performance benefits of different types of motor oils. Nearly
70% of DIY consumers reported purchasing one PCMO product consistently because of trust and
familiarity with the brand. For the DIFM segment, the convenience of the installer’s location and the
speed of the service were paramount in the purchase decision. 56% of DIFM consumers said that they
sought a specific PCMO product. 83% were willing to accept a professional installer’s recommended
PCMO brand if it met their price expectations and the vehicle manufacturer’s requirements.

Because the DIFM consumer’s loyalty was tightly linked to convenience and service quality, Baud
and Motoline had invested heavily in expanding their fast-lube chains in the 1990s. Through
strategically located outlets and loyalty programs for repeat customers, the two market leaders had
made themselves the easy, obvious choice for consumers in the most attractive metropolitan markets.
With nearly 2,000 stores that sold its products exclusively, Baud had the largest fast-lube chain in the
country. The company also enjoyed a strong presence in mass merchandisers and clubs, where it was
the preferred brand for oil changes at Walmart and was granted significant shelf space, which helped
it capture DIY sales. Similarly, Motoline had 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. Avellin had
historically been favored by independent fast-lube stores, oil change–plus stores, and repair shops.

Avellin regularly surveyed consumers to gauge both brand perception and intent to buy at the next
oil change. Intent to buy was similar for the leading PCMO brands across consumers, but there were
differences within segments. Baud was relatively stronger with the DIY segment and among DIFM
consumers that prioritized quality. Among DIFM consumers seeking the best price, Avellin held the
strongest position. According to Avellin’s surveys, more than 40% of consumers were undecided about
the brand for their next oil change (see Exhibit 3 for consumer intent to buy branded PCMO).

Avellin Distribution Channel Strategy

Beginning in the 1980s, Avellin had focused on becoming the preferred brand in the DIFM channel.
Because it was easy for fast-lube stores and other independent installers to switch PCMO brands,
Avellin worked hard to provide the best service and promotional programs to wholesale distributors
and their DIFM customers. By 2013, its revenues came from three key customer types:

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Independent DIFM. Avellin was the leading PCMO brand among independent DIFM customers, which
included fast lubes, oil change–plus stores, and repair shops. Order fulfillment was handled through a
network of independent wholesale distributors. To build loyalty, the company promoted its Aventage
program, which involved dedicated sales managers, management of in-store displays, provision of
consumer education and support, and bulk discounts. Sales managers provided Avellin with insight
on consumer behavior and trends, and helped the company to ensure that wholesale distributors
served DIFM customers effectively. In 2013, Avellin had approximately 6,000 independent fast-lube
customers, of which approximately 4,400 were in the Aventage program. It also sold to 6,500 oil
change–plus stores and repair shops. Independent DIFM customers accounted for 68% of its sales.

National retailers. Large mass merchandisers, warehouse clubs, and auto parts stores sold Avellin’s
PCMO line. Sales to these customers were for the DIY segment only. Major retailers that also offered
DIFM services, such as Walmart, usually promoted their own private label, Baud, or Motoline. In order
to build loyalty among its base of DIFM customers, Avellin had been satisfied to put products on the
shelf for the DIY segment. National retailers accounted for 9% of Avellin’s PCMO sales.

AvellinAuto. Avellin also sold via its own AvellinAuto stores, comprised of mostly company-owned
and some franchised outlets that sold Avellin products exclusively. Reluctant to anger its other DIFM
customers, Avellin had been less aggressive than its competitors were in expanding its fast-lube chain.
When selecting sites for new stores, the company aimed for locations that would minimize the impact
on existing customers. Because AvellinAuto stores were serviced directly through the company’s
regional distribution centers, rather than through a wholesaler, the effective manufacturer gross profit
was about $0.75 higher per five quarts, the amount typically required for an oil change. With 436 stores
open as of 2014, the AvellinAuto chain generated approximately 7% of PCMO sales, as measured by
manufacturer prices. The remainder of PCMO revenues came from a mix of national DIFM chains, car
dealers, convenience stores, and online sales.

Price competition among channels had long been a cause of tension. Avellin had never actively sold
to national accounts for DIFM services, but mass merchandisers and clubs occasionally ran local
promotions featuring Avellin products. Invariably, this led to complaints from independent fast lubes
that felt they were losing local business. Recently, Aventage customers had begun to demand their own
private-label product that could give them good margins and a low price to compete against the low-
cost oil changes at mass merchandisers and clubs. It would also serve as a reference point for consumers
to see the low end of PCMO, which installers would use to help them trade up to the better Avellin
products. To date, the company had avoided this strategy for fear that it would merely cannibalize
existing Avellin sales and exacerbate the price pressure that already existed.

The Eco7 Launch

Recycled Motor Oil

There was a trend towards more fuel-efficient, environmentally friendly vehicles. Hybrid vehicles
featuring both gasoline and electric engines, such as the Toyota Prius, had mass market appeal. Surveys
indicated that increasing numbers of consumers valued environmentally friendly options and would
pay a premium to be green. In 2012, Avellin began developing a new motor oil manufactured from
recycled materials that would be much more environmentally friendly than were existing products.
Jonnerson reflected on the original impetus for the recycled oil project that led to Eco7: “A lot of the
buzz is around hybrids or electric vehicles, but these are expensive, infrequent purchases, which are
3% of 2013 sales. Most consumers still have standard cars that require regular oil changes. An

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environmentally friendly motor oil with competitive performance would be compelling. We can create
buzz and regain share if we beat the competition to the punch.”

The environmental case for recycled motor oil was clear. Used motor oil harmed soil and water if
not disposed of properly. When managed properly, it could be refined and reused. For example, it
could be recycled as heating oil or used to make asphalt. Nearly 80% of discarded PCMO was usable.
Used motor oil could also be recycled into new motor oil through an efficient refining process.
Discussing the product with the R&D team, Jonnerson laid out the pitch he wanted to make for recycled
oil: “Customers should know that, with every quart, they reduce the amount of oil that needs to be
extracted from the ground, thereby reducing the toll on the environment. Each quart should mean a
little less dependency on imports from foreign producers. It also means we are not recycling the used
oil just once, but potentially multiple times.”

To date, the motor oil industry’s efforts to be green had been modest. Sevoline, ranked fifth in the
market, became the first major manufacturer with a green motor oil when it introduced SevoGreen, in
2011. Like Eco7, SevoGreen was manufactured with recycled motor oil. It performed on par with other
conventional oils, although, at $7.50 per quart, it cost nearly twice as much. Sevoline sold primarily
through the DIFM channel, where it focused on oil change–plus outlets, such as tire and muffler repair
shops. Avellin’s research suggested that one-third of Sevoline’s DIFM customers had agreed to carry
SevoGreen, but few were motivated or trained to promote it. Sales to DIY consumers were modest, as
Sevoline invested little in a national marketing campaign to build awareness. Avellin’s own consumer
research confirmed interest in green motor oil, but indicated that pricing would be important. (Exhibit
4 provides information about consumer interest in green oil.) Survey results did not always correspond
to consumer purchase decisions, but the results suggested a market opportunity. Jonnerson believed
that the market for green PCMO would grow, but that it needed the right product— marketed in the
right way and at the right price.

Eco7 Test Marketing

After two years of research and development, Eco7 was ready for launch. Made of 65% recycled oil,
it was manufactured using 45% less energy than was typically used to produce conventional PCMO.
In addition, Avellin’s refining process and additives gave Eco7 a longevity and performance
comparable to a synthetic blend, making it superior to conventional oil. The product performed better
at extreme temperatures without breaking down and, for most vehicles, would require replacement
only after 7,500 miles. Avellin’s cost to produce Eco7 was approximately $2.01 per quart, as compared
to $1.95 and $1.20 for Avellin’s synthetic and conventional oils, respectively. Jonnerson explained:
“Producing recycled motor oil is more costly for us, which means it will be more expensive for the
consumer. The challenge for us is to make sure they see the premium paid for Eco7 is not only for an
environmentally friendly product, but also for better driving performance.”

In two test markets, Avellin and the wholesale distributor recommended a retail price of $6.75 per
quart, similar to that of synthetics. In the third test market, Avellin tested a retail price of $5.25 (see
Exhibit 5 for DIFM prices and market structure). The product was packaged in an eye-catching green
bottle and came with accompanying in-store display materials. The company advertised on local
television and in newspapers, touting Eco7’s advances in combining superior performance and
environmental friendliness. Avellin also used the opportunity to gauge the effectiveness of its Eco7
campaign slogan, You have the green light.

As part of the test-market program, Avellin surveyed buyers of both Eco7 and other motor oils. The
survey found that buyers of Eco7 were more likely to have consciously switched from a competing
PCMO, and to drive imported and hybrid vehicles. Relatively few consumers reported seeing the local

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advertisements for Eco7, and most were made aware by the in-store display or the suggestion of their
DIFM installer. A mystery-shopper study found that installers tended to offer Eco7 only to drivers who
appeared to be affluent. Furthermore, although Avellin’s wholesale price and supporting displays
were consistent at every DIFM outlet, there was significant variation in the retail …