Quaker State Running on All Cylinders Again

Just a few years ago, Quaker State Corp. saw itself on a slippery slope. The motor oil company had surrendered its lead in the industry, dividends were more than the company could afford and U.S. drivers were changing their oil less frequently.

So Quaker State decided it needed its own oil business change.

With a new chief executive, new headquarters and new products, the company is now heating up the industry.

The company halted the downward spiral from the No. 1 spot in the country in 1986 to No. 3 in 1993 when the board brought in Herbert Baum from outside the ranks of Quaker State.

The former Campbell Soup Co. executive brought with him a mandate for change to fight an array of formidable competitors, including the No. 1 motor oil company, Pennzoil, which runs Jiffy Lube; Ashland, which operates Valvoline Instant Oil Change Centers; Texaco and Castrol.

“Probably 30 days after I arrived, it occurred to me that Quaker State was making $600 million in sales and making 1% after tax,” Baum said. “If I had known how bad it was, I would have stayed at Campbell Soup.”

Baum replaced his management team with people familiar with branded products; he reduced staff at corporate headquarters by 6% and at the lubricant division, now named Q Lube, by 25%. He fired the firm’s advertising agency and he cut dividends in half.

“Some of the people buying for dividends were angry, but Wall Street has been very kind,” Baum said.

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Then Baum made a move that garnered him bad press in the company’s hometown: He decided in 1995 to move Quaker State from Oil City, Pa., to the Dallas area. The company, founded in the Quaker State in 1913 as a small marketing company selling crude oil, had simply outgrown the rural community.

Pennzoil made its own move to Houston from Oil City 30 years ago.

“We were the last ones to leave,” Baum said from the former Exxon offices that now serve as Quaker State headquarters. “But we did the painful things.”

Now comfortably settled, Baum can narrow his focus to the company’s holdings.

At first there were divestitures. Heritage Insurance Group was sold for $86 million to General Electric, and the company’s exploration and production facilities went for $56 million to Belden & Blake Corp. Also sold was Quaker State’s petroleum refinery in West Virginia, a site that had experienced some environmental problems.

New products have been a priority. Quaker State introduced 4x4 motor oil specifically for drivers of sport-utility vehicles and light trucks.

Analysts estimate that 4x4 motor oil contributes between 10% and 20% of sales at many Q Lube centers.

“They had tremendous success,” said analyst John Hervey of Donaldson, Lufkin & Jenrette.

Then there were the acquisitions. Quaker State bought Specialty Oil in 1994, doubling the size of its lubricants business. And in 1996, Quaker State bought Slick 50, a Houston maker of automotive engine treatments; Cleveland-based Blue Coral, which makes car wax and cleaners; and Medo, of Tarrytown, N.Y., which produces automotive air freshener products.

“What we’ve done is gain the reputation as being the consolidator in the business,” Baum said.

Analysts have applauded the purchases.

“They’ve been able to acquire higher-margin products at good prices. The key here is their distribution network, which enables them to acquire somewhat regional brands and put them into their network,” said David I. Begleiter, an analyst with Credit Suisse First Boston Corp. “They’ve been able to realize significant synergies by leveraging the sale of these products through their national, very extensive distribution.”

The expansions have had solid performances, helping boost first-quarter income in 1997 by more than 20% to $7.1 million. Income for the second quarter jumped to $8.8 million.

Currently, the company’s different divisions’ headquarters are spread across the country.

“For now we’ll leave them where they are, but sooner or later most will come into Dallas,” Baum said.

Baum said other acquisitions are in the company’s future, preferably consumer products. He also plans to enlarge the Q Lube segment of oil change stores from 400 company-owned sites and 100 franchises.

“We’re hoping to move to 1,000 by 1999,” Baum said, adding that some of the growth will be from buying regional chains similar to the purchases this year of the California-based Snappy Lube.

The Q Lube segment of oil change sites also will grow through agreements with stores like Monro Muffler/Brake Inc. and Discount Auto Parts, he said.

Analysts and the company say the expansion is needed to gain market share since the retail price of a quart of oil is about the same as it was a decade ago, selling for about $1.

So for current-No. 2 Quaker State to beat out Pennzoil at the top of the industry, it’ll continue its aggressive track.

“There is no other primary motor oil company other than Quaker State,” Baum said. “Everybody else is bigger and has deeper pockets. So, we see ourselves as guerrilla fighters.”