As Kim Bowers made her first round of visits to the newly spun-off, 1,900-store CST Brands, she dismissed the corporate veneer and mixed with folks at the store level. She blended in beautifully, surprising many of the Hispanic employees with polished Spanish.
Her fluency went viral through CST. As she stepped into the next store, greetings in Spanish quickly followed as employees approached the new president and CEO of Valero’s yet-to-debut Corner Store.
The kinship prompted them to joke with a non-Spanish-speaking district manager: “Now we can talk about you.”
Bowers, 49, is winning followers down the line from store clerks to national pundits, recently being ranked No. 38 on Fortune magazine’s list of the country’s 50 most powerful women.
She accepts the attention with uncommon ease.
As if bringing a publicly traded network of bolted-together, Big Oil store formats into a new era of convenience retailing weren’t difficult enough, Bowers has a disarming confidence that’s at once pragmatic yet optimistic. She’s fully aware of the chain’s legacy network while at the same time enthusiastic about the promise of its ground-ups and the chain’s evolving foodservice focus.
“We have almost 1,000 of what we would define as legacy locations, so we can’t build enough sites for them to be irrelevant. But at the same time,” she quickly adds, “our new stores can compete anytime, anywhere.
“Competition is competition. We’re not afraid of it.”
Maybe what Bowers needs to fear is a carnivorous Wall Street, whose rapacious expectations could very well exceed CST’s best performance.
In mid-December, stock prices for CST were in the $34 range, while Corpus Christi, Texas-based Susser was at $63 and Ankeny, Iowa-based Casey’s General Stores was at $75. Dubbed from the outset as a single-digit, “slow growth” investment by many financial houses, the fledgling CST network has a lot to prove.
Will the maturity of its older assets weigh down the promise of its aggressive new-build pace—projected to double in 2014, with 30 stores on the map compared to 15 that came online last year? Add to that its yet-to-be-realized foodservice potential and overall brand offer, and the uncertainties build.
At press time, the company was still field-testing the brilliant yellow color scheme of its Corner Store logo, a clear sign that the step out of Valero’s shadow may be more of a leap.
And yet, one senses that despite obvious roadblocks, CST is the most prepared of any oil-company spinoff to perform well in the public limelight.
Consider the pieces in place:
▶An executive team in sync with each other and what customers want from convenience, ready to abandon a pump-first Big Oil mentality.
▶Ownership of 81% of the land beneath its stores, along with $300 million in cash from new fuel-contract terms and access to a large credit line, which puts it in a solid financial position.
▶The beginning of a retail culture that prioritizes the feel and flow of stores, as well as a friendly front-line environment.
▶A distinctive foodservice mentality set to execute at the store level, having gone as far as developing original successes such as a savory “kolache” (think pig in a blanket).
▶A private-label program as extensive as any in the industry, capturing consumer trust despite essentially being tied to a gasoline brand.
▶The “perfect storm” of the Texas c-store demographic, a mix of Hispanics and energy and construction workers who, according to Bowers, result in stores that in some areas “just can’t keep product on the shelves.”
During an exclusive interview with CSP in November, Bowers and her team exuded a confidence blended with a sense of opportunity and challenge. For certain, the pillars of strong equity, modest debt and a solid strategy are emboldening the San Antonio chain to embrace a retail personality that received only modest attention while under the multibillion-dollar Valero refinery business.
Changes are taking place both culturally and among the stores’ product assortment. New policy changes include a jeans-all-week dress code and mandatory days in the field for administrative staff. On the culinary front, a new food czar is sizing up CST’s menu potential.
“We’re lucky [in that] this is a new company, but it’s not,” says Hal Adams, senior vice president and chief marketing officer for CST, referring to how it ran stores for 20 years under Valero’s watch. “We’re pent-up dogs ready to run.”
Bowers’ Power
The retail prowess and passion Adams mentions is what made the offer of running Valero’s retail spinoff attractive, Bowers says. Groomed for leadership under Valero Energy’s top boss, Bill Klesse, Bowers emerged not from the retail end but from the legal side of the business, operating for years as part of the company’s M&A team.
This team spearheaded much of the acquisition growth that would make Valero the nation’s largest independent refiner-marketer. (See the company’s M&A history on p. 44.) She joined Valero’s legal department in 1997, became vice president of legal services in 2003 and subsequently worked in compliance, legal affairs and engineering. She was executive vice president and general counsel at the time she was elected to lead CST one year ago.
During her rise, she’s had high-level discussions about what to do with a sprawling retail network built largely as an afterthought of a rapidly expanding refining universe. Break up the assets? Find a single bidder? File an IPO?
Eventually, the idea of a spinoff to shareholders prevailed. After obtaining a special tax-exempt letter from the Internal Revenue Service, Valero gave current shareholders a single stock of CST for every nine held in Valero. The remaining 20% would stay with Valero under an agreement that they would sell it on the open market at some future date.
All this finalized May 1 of last year when, as a spinoff company, CST Brands Inc. went public.
Heavy Lifting
Though CST enjoys the desirable advantage of owning most of its dirt, it also faces the difficulty of a legacy network and the potential investment needed to keep those locations viable. A source close to c-store development in Texas says the “oil-company mentality” would often mean initial efforts to improve those locations failed as those in charge started to realize the true costs of what was needed.
Everything from making restrooms compliant to the Americans with Disabilities Act (ADA) standards to equipping a site with a proper foodservice program added up. Even rebranding the stores to a single, unified logo costs money.
“I know in one instance, the company only went so far and then got scared,” the source says.
While conceding that CST “does not have deep pockets” in its spinoff incarnation, as mentioned, it does own 81% of the land beneath its stores. And while reasonably leveraged with a low-interest, $500 million term loan, it “hit the bond market at the best time ever” and has $550 million in bonds, plus a credit revolver it hasn’t touched. In addition, moving payment schedules on its fuel contracts from two to 10 days freed up $300 million in cash.
But how CST taps its resources will be critical, the source says. He refers to Tulsa, Okla.-based QuikTrip, saying, “People envy [QuikTrip] and try to copy bits and pieces of that program, but nobody wants to pay for all of it.”
The key is having a clear mission, the source says. Referring to Chicago-area supermarket chain Dominick’s, which ceased business in that market, “It lost its mission, became a common, everyday grocery store and plain went downhill.”
While recognizing CST’s challenges, Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities, New York, expressed optimism in a report on the company released last fall.
The chain is “on the cusp of an accelerated growth trajectory,” she said, attributing her prediction to CST’s focus on merchandise offers, larger formats and new builds. She cautioned, however, that its current stock valuation “already reflects this unrealized potential.”
Retail Mindset
Part of the assets that make up CST today have experienced similar ups and downs. Part of its legacy came from Houston-based National Convenience Stores (NCS), which like 7-Eleven and Circle K in the 1970s and ’80s engaged in a reckless M&A expansion strategy, only to fall into bankruptcy.
Adams came from the NCS side, which in its struggles to reinvent itself created a hexagonal design of larger-format locations that remain prominent in many Texas markets today.
Then the dominos that led to CST began to fall. Regional refiner Diamond Shamrock scooped up NCS. Three years later, that entity merged with Canadian refiner-marketer Ultramar along with Beacon Oil as part of a large consolidation play. In 2001, David acquired Goliath as Valero—at the time a smaller company—picked up Ultramar Diamond Shamrock (UDS) to create what is known today as Valero. (“Valero” comes from the Spanish name for the Alamo fortress in San Antonio.)
That patchwork of about 2,300 stores would slim down as the company jettisoned smaller formats or withdrew from weak markets. The move to a leaner retail portfolio also allowed the company to better categorize its formats, creating groupings of like stores (such as hexagonal stores and kiosk-style locations) vs. a broader spectrum of formats, Bowers says, making the diversity more manageable.
With a network of 1,500 stores, then- Valero head Bill Greehey had a vision. Though Valero had a refining presence, it had no name recognition on the retail end. Putting the Valero logo on all those canopies gave the sites instant brand recognition.
“We plowed a lot of capital into the stores,” Adams says. “We wanted them to look welcoming and provide a good face.”
Greehey also had an affinity for the store-level employee. “Everybody mattered and everybody deserved a chance,” Adams recalls. “It was already a core value to treat people fairly and well.”
As Klesse followed Greehey, the vision for retail only grew.
In 2006, according to Tony Bartys, senior vice president and COO for CST, Klesse dispatched several executives to a California Valero jobber who had been building 10,000-square-foot stores. While Bartys and his group decided that the rural concept wouldn’t fly in many of Valero’s markets, they developed a 5,600-square-foot plan, with food being 40% of the offer.
In addition to roller grills, the company started the kolache program, which evolved from a sweet snack into a savory one. It also paved the way for a series of kitchen layouts and in-store, made-to-order concepts that continue to evolve today.
Yet despite the headway, retail would never garner the necessary attention while tucked inside a refining-first culture. About six years ago, Klesse set in motion plans to operate retail as a separate entity within the company. Adams recalls how the retail department paid for legal, financial and corporate services, even though it was still a part of Valero.
“We did it so that we could have our own balance sheet and income statement to prove our potential,” Adams recalls. “Then [in 2012], we started the process to see what was the most viable way to break the company apart.”
Bringing Down the Wall
For all the fanfare that accompanied her taking on CST, Bowers did not ignite her first weeks as top executive with highfalutin retail fireworks. Her first step was the proverbial blocking and tackling: developing an administrative infrastructure for the new company and injecting new talent in the areas of finance, accounting and technology.
Foundationally stronger, CST is now focusing on growth, maximizing existing assets, expanding market strongholds with larger formats and, just as important, emblazoning a distinctive brand cachet that separates itself from the more formal Valero profile.
To this end, when the company officially went public last May, Bowers instituted a more informal dress code of jeans and a company shirt, throwing in the option of men having facial hair. (It had been deemed against corporate values because workers at Valero’s refineries had not been allowed facial hair for safety reasons.)
Bowers wanted to demonstrate a clean break. So although CST’s offices share the same campus as Valero, Bowers wanted the vibe at CST to be more relaxed, from opening up the offices to allow more fluid brainstorming to casual attire.
“And I like wearing jeans, so it was also self-serving,” she says.
To unify this burgeoning culture, she mandated “Corner Store Time,” a required two days of work at the stores annually for all administrative employees (five for leadership staff), with bonuses tied to their completion. And in the fashion of retailer Nordstrom, she also holds entire departments accountable. If one person doesn’t do their time, no one gets their bonuses, initiating a sense of group responsibility.
The plan has helped open up discussions from the top down, allowing even entry-level cashiers access to top-level brass.
Bowers is also reviewing store-level incentives, recognition and community activities, both creating and initiating new ideas to help folks connect at all levels.
It’s a way of creating the kind of culture needed at Corner Stores, especially those without the space for expanded foodservice or in areas that compete with top-notch retailers.
“The challenge is corner by corner vs. store format,” she says. “As long as we continue to give great customer service [we can compete], even if we’re not in the bright, shiny boxes.”
Food Future
After spending time in the world of restaurants and in the galley of a naval ship, Richard Poye now walks the aisle of c-stores with fresh eyes.
As CST’s new foodservice director, Poye was spending his first weeks on the job when he talked to CSP, taking mental note of existing facilities, processes and products.
“How do you come into existing stores and develop concepts that can work with the infrastructure of that store?” he says. “It’s a challenge, but it’s not impossible.”
Another challenge is luring patrons who might not otherwise be drawn to just another roller-grill menu, while simultaneously not alienating core customers. That’s where there may be opportunities unique to CST. Patrons are already loyal to its eclectic tastes, including whoopie pies and kolaches, so possible opportunity exists in healthy or energizing food options, he says.
Either way, quality is important, Poye says. “How we offer food in a c-store has to be as good as any QSR, fast casual … or any of our great [c-store] competitors,” he says. “Our food needs to be that good if we are to survive in this business.”
Equally important, says Adams, is to view food not from traditional day-parts. “We get so tied up in food being a complete meal,” he says. “People are now eating six times a day, eating when they can and in small bits. That’s what we’re good at.”
Going forward, according to Adams, execution will be key. The way kitchens are laid out, what ingredient sits where, what’s delivered precooked and how meals are prepared—these are all things that will make or break a foodservice program.
“We’re so bullish on the 30 [new-to-the-industry] stores we’re planning, because we know the percentage of food we can sell will be exponentially better than what we have in existing stores,” Adams says. “In a new store, consumers will give you permission to sell food.”
The Fate of Fuel
In an about-face of his enthusiasm over food, Adams addresses the importance of taking fuel out of that particular equation, getting the pump traffic and parking obstacles out of the way of the food purchaser.
Both Adams and Bartys seem to have reached the same conclusion: The fuel-only customer has a different mindset than someone interested in eating. “It’s amazing that we wondered why no one would come into the store when we only had seven parking slots,” Adams says. “We’re now putting in 50 and placing the fuel island on the side of the store.”
Of course, these insights in no way mean CST is ignoring fuel. In fact, in its investor call last fall, the company reported initial success in developing pricing methods that build margins while holding onto volume. Bowers also says CST now has the option to choose other fuel brands or go unbranded (it’s currently testing the Corner Store fuel brand in Houston) as a way to enter corners where a Valero-branded retailer already operates.
That said, shoppers wanting to go into the store do not wish to run a gauntlet to get inside.
“Are we going to lure the pump customer in?” Bartys says. “I’m not going to say never, but the fuel-only customer may be coming in once every 10 days. The food customer ... may come in three, four times a week, sometimes twice a day. Let’s make it easier for him.”
Building a Brand
The ability to debut the Corner Store brand was a long time coming, says Adams. Over 15 years, the company has had three different Valero logos, all starting with the Valero mothership. Corner Store has the opportunity to establish itself as a “fresh choice” both in its product offer and as a c-store focus at the company’s fuel locations. Once CST gets past its 52 C S P January 2014 current audience testing with its Corner Store logo, it intends to go market by market, bombarding the consumer with advertising about what’s behind the sign, he says.
But along the way, Valero did “own” the store side, Adams emphasizes. It developed a private-label program of 200 SKUs, everything from beef jerky to salty snacks, soft drinks to water.
“Private label does a lot for us,” he says. “It helps us understand the total cost of goods, allows us to negotiate with national brands and give the customer good value.” Private label also develops loyal customers, he says, who are interested in visits to CST locations for those products.
While it has and does work with proprietary brands such as Subway, Adams says the company kept much of its foodservice options tied to its own brand. Going forward, it’s interested in partnering with national QSR brands at highway locations where it can draw in new customers, but for the most part it intends to stay on its own Corner Store track.
And for Poye, that’s the opportunity. “We’re interested in all levels of service, execution, margin and inventory to the point of driving quality food and great food experiences,” Poye says. “Our challenge in the current environment is to … make a broader brand that will drive a single vision and that you can execute.”
Growth Minded
Bowers herself is bullish on the opportunities foodservice will bring, especially at the new-build locations. “It’ll have a different mindset,” she says. “What opportunities are we missing from a food perspective?”
That said, growth must occur at the proper pace and with the right kind of retail offer, she emphasizes. She says the industry is ripe for consolidation and that for a location to sustain success it needs to have scale, the ability to hold fuel margins and have an established foodservice program—things small operators may not have access to.
At the same time, she says that in the past year, her team has looked at more than 1,000 sites and chose not to buy.
“It’s about having the correct sites,” she says. “And how we grow customers vs. rooftops.”
CST by the Numbers
CST Brands’ numbers speak to the company’s challenges as a network, but also its scale and the opportunities it has to grow via new builds and M&A.
1,900: Number of company-run c-stores in the United States and Canada
1,000: Number of “legacy” locations that don’t fit the 4,500- to 5,500-square-foot model
87 and 250: Number of kiosk (less than 1,000 square feet) and small-format sites, respectively, in CST’s network
61%: Percentage of CST stores in Texas
81%: Ownership of store property in United States
2,200 square feet: Average store size
$12 billion: Revenues in 2012
$32.53 per share: Price at which CST was trading in December 2013
On the Menu
With an eye on developing a unified program, CST’s new foodservice director, Richard Poye, says he looks at everything from supply to store-level execution.
“You look at the steps and remove things that don’t benefit the dish or add to safety,” he says. “You go for better-tasting food and what it takes to streamline the process.”
He also tips his hat to what CST has already done, creating original foodservice items, developing kitchens at many of locations and putting that foodservice mindset in front of its customers.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.