CST Brands: Turning a Corner

As CEO of Valero spinoff, Bowers brings fresh energy to new retail brand

Angel Abcede, Senior Editor/Tobacco, CSP

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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.

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