Quick Lube History – February 1989: JIFFY LUBE STALLED, BUT ON THE RIGHT ROAD

BALTIMORE — W. James Hindman was at the board drawing circles and arrows. He was talking fast, too — talking and drawing, and occasionally punching the air with his fist. It could have been a scene from his days as football coach at Western Maryland College. But Hindman, president of Jiffy Lube International Inc., wasn’t trying to inspire a team. He was explaining a corporate game plan gone wrong. “Our strategy was correct, but the execution was poor,” Hindman said, summing up the general cause of his company’s fiscal crisis. Baltimore-based Jiffy Lube, the nation’s largest chain of quick oil-change service shops, with sales of $78.2 million last year, lost $38.5 million in the January-March period and is expected to report a loss for the year ending June 31. The third-quarter loss was the result of a $39 million charge against earnings to cover anticipated losses. The writeoff cut the decade-old company’s net worth to $43 million from $80 million and put Jiffy Lube in technical default on loans totaling about $125 million. Now, after laying off 55 headquarters employees and taking other cost-saving steps, Jiffy Lube is trying to rework payment agreements with its creditors in proceedings that Hindman likens to an informal bankruptcy reorganization. Jiffy Lube’s fall from grace is a textbook study of the triumphs and pitfalls of entrepreneurship, said Hindman, who built the company to 1,029 outlets nationwide in just 10 years. How Jiffy Lube will rise from its current difficulties and become a mature corporation will constitute another lesson. But it’s one that Hindman said he does not expect to be around to teach. “It’s just clear to me that what we need now is a professional management applicable to running a corporation with over 1,000 stores and 15,000 employees,” Hindman said. “I haven’t been trained for that. Some guys who can create a business are not necessarily the best ones to run a business.” As a result, Hindman — who owns 27 percent of the company — says he is looking for a friendly buyer with enough cash and professional management expertise to solve the company’s financial problems and help Jiffy Lube reach its goal of having 3,000 stores by 1995. “That’s not being humble. That’s being smart,” Hindman said of his admission that he lacks the training “or the patience” to run a full-fledged corporation “with all of its management committees and systems.” Paradoxically, the steep growth curve that Hindman concedes he was unable to manage was precisely what he thought the company needed to stay on top of the fast-growing quick-lube business, which some industry experts say could be worth more than $3 billion by the middle of the next decade. Quick-lube outfits like Jiffy Lube account for about 6 percent of the $10 billion national market for changing oil in cars and light trucks. Gasoline stations, garages, car dealerships and stores such as Sears Roebuck & Co. together account for about 51 percent of the oil-change market; another big chunk is occupied by do-it-yourselfers, those weekend mechanics who change their own oil, often dumping the used oil into storm drains or discarding it with the trash. Industry experts expect the do-it-yourself share of the oil-change market to sink under the weight of protests from environmentalists, who have been calling for tougher laws governing the disposal of hazardous wastes. The quick-change shops are hoping to pick up business from the do-it-yourselfers, and parlay that into a one-third share of the total market by the mid-1990s. With its eye on that potentially huge piece of business, Jiffy Lube put its corporate accelerator to the floor. To achieve the rapid growth it thought it needed, Jiffy Lube had to provide financing to many of its franchisees so they could set up shops and “capture corners,” as Hindman put it, before competitors could open across the street. The company loaned money to many of its franchisees to help them raise the $400,000 to $600,000 needed to pay for land, construction and start-up costs for each Jiffy Lube store. Under the franchise agreement, the franchisees paid the company a license fee of $35,000 a store — $25,000 if they bought more than one — and agreed to a royalty payment equivalent to 6 percent of sales. “We recognized that we were running some risks in being a banker” to franchisees, Hindman said. But with so many potential competitors threatening to move in on the auto-service niche that Jiffy Lube developed, he said, “we felt that we had to finance franchisees to enhance rapid growth to give us the critical mass of stores that we needed to justify national advertising and to attain top name recognition in the marketplace.” Jiffy Lube achieved its publicity goal, and much to the company’s chagrin the Jiffy Lube name often is used as the generic reference to all fast-lube shops. Name recognition helped the company grow. In July 1986, flushed with success and hungry for cash, Jiffy Lube went public, selling 4.6 million shares at about $9 apiece. Jiffy Lube quickly became a Wall Street darling, and by March 1987 the stock price topped $23. But while the parent company was booming, many franchisees were struggling to meet their sales projections. That in turn made it difficult for them to pay off their loans from the company, and reduced the amount of royalties Jiffy Lube was collecting. Suddenly, bankrolling franchisees didn’t seem like such a good idea. It wasn’t long before the company ran into major financial problems. There also have been some consumer complaints. In 1987, 12 Jiffy Lube stations in Pennsylvania operated by Tri-State Quick Lube of Cherry Hill, N.J., were accused of tricking people into getting unneeded transmission and differential fluid changes by showing them “dirty” samples of fluid allegedly taken from their cars. Tri-State accepted a compliance agreement without admission of guilt, and Jiffy Lube instructed its franchises to eliminate bogus fluid comparison tests. Some observers say Hindman and Jiffy Lube were misled into too-rapid expansion by the company’s phenomenal early success on the East Coast, particularly in the Washington and Baltimore areas. Sources close to the company suggest that Hindman wrongly assumed that the formula for success in the Washington and Baltimore markets would automatically translate to other areas. Jiffy Lube’s 36 Washington area stores service an average 60,000 cars and light trucks a month, 10,000 more than the average Jiffy Lube store. The stores had sales of $24.2 million last year, nearly 33 percent of Jiffy Lube’s revenue. But the success of the local franchisees is closely linked to the affluence of the Washington market and the prevalence of working couples, said Anna Johannessen, a spokeswoman for Jiffy Lube Washington Area Cooperative Inc., the local dealer association. “Who’s got the money to maintain their cars constantly? The higher income folks do,” she said. “You’re not going to see lower-income people coming in to pay from $23.95 to $27.95 to get their oil changed every 3,000 miles.” Jiffy Lube is having some success on the West Coast, particularly in Southern California, officials said. But the company is struggling in the Northwest, particularly in Oregon, where it entered the market last summer by buying 14 former American Lube stores but has been slow to get a favorable return on its investment. Marshall A. Stevens, the entrepreneur who sold the stores to Jiffy Lube last year for an undisclosed sum, said, “I just don’t think Hindman understands the West Coast the way he understands the East Coast.” Jiffy Lube’s marketing strategy is geared to life in the fast lane, Stevens said, and such an approach is inappropriate for an easygoing market like Portland. “It’s advertising and management,” Stevens said of Jiffy Lube’s Oregon problems. Donald E. Ervin, a former Northern Virginia banker who is president of Sterling-based Precision Tune Inc., one of Jiffy Lube’s competitors, said the problems Jiffy Lube has had in coping with its rapid expansion are typical of those that often plague entrepreneurial businesses that grow too fast. “Trying to control excitement in growth in a market that needs to be serviced is difficult,” Ervin said. “The best of people can make misjudgments under those circumstances. But in business, as well as in anything else, when you get the signal to change and you don’t, you run into trouble.” Precision Tune, by contrast, is using a slower growth strategy in spreading its tune-up and oil-change shops, planning to expand from its 425 outlets today to 1,000 by 1993. “We have to concentrate on the financial health of our franchisees and their ability to meet a changing market,” Ervin said. That means making sure that potential franchisees have ready access to — or have the training to find — money to invest in their businesses. Hindman more or less agrees with Ervin’s assessment. He conceded that, in his drive for rapid expansion, he might have missed signals that it was time for Jiffy Lube to slow its growth, or to at least temper its willingness to underwrite substantial amounts of franchise start-up costs. If he had to do it all over again, he said, “I think we would have gotten professional managers earlier, people who had expertise in deciding who should get credit and how much credit should be given,” Hindman said. “We would have done a better job of checking the cash-flow projections of franchisees and determining their ability to raise capital.” Hindman said Jiffy Lube could have avoided its third-quarter loss of $39 million “had everybody been in the proper agreement with regard to the payment schedules that they were on.” Still, Hindman said he believes that Jiffy Lube faces a brighter future, albeit one that probably will be presided over by a new owner. The search for a buyer, underway since February with the help of investment-banker firm Alex. Brown & Sons, should yield results soon, Hindman said, without giving specifics. “There are several people who have expressed interest, but the process takes time,” Hindman said. “What we have to demonstrate” to prospective buyers “is that the highest and best value for everybody would be the sale of Jiffy Lube as a going concern with the number-one market position” in the fast-lube industry. One rumored buyer or investor has been Pennzoil Co., the Houston oil company that is Jiffy Lube’s chief supplier. Pennzoil helped get the company started, and has provided financial assistance in recent months in the form of cash and credit forgiveness amounting to $18 million. Pennzoil officials refuse to comment. Whoever gets Jiffy Lube is likely to get it at a bargain, at least compared with its value a couple of years ago. From its high of $23 then, Jiffy Lube stock has dropped to $5, as of the end of last week. Hindman could reap a small windfall on the sale of his stake in the company, which is worth more than $20 million at the current stock price. One way or another, experts say, Jiffy Lube is likely to survive its current troubles. “The Jiffy Lube name is a very valuable commodity in this industry,” said G. Lawrence Northrup, executive director of the Convenient Automotive Services Institute in Bethesda, the trade representative for Jiffy Lube and other quick-grease and quick-fix auto service firms. “There’s no way that it’s going to just go away.” Hindman, 53, offered a similar assessment of his personal future. “You know what they say about us pioneers,” he said. “We’re the people with arrows in our backs. I have a few arrows, but I’m not dead yet.” He added that he expects to remain at the company “as a kind of spiritual leader” when and if it is sold. He may write a book about his tenure as Jiffy Lube’s president. In the final analysis, the former Western Maryland coach says, the experience has made him realize his limitations. “I’m a coach, not a commissioner,” he said.

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