Valero spinoff will form San Antonio’s 3rd-largest company

SAN ANTONIO, Texas — When Valero Energy Corp. spins off its retail stores May 1, the new company — CST Brands Inc. — instantly will be San Antonio’s third-largest publicly traded firm by revenue.

CST Brands will take over almost 1,900 retail sites in the United States and Canada, and operate most of the stores under the existing Corner Store name. It will be one of North America’s largest independent retailers of transportation fuels and convenience merchandise.

“We have been a very small piece of the Valero revenue pie — 10 percent — but on our own we’re a really big company,” said Kim Bowers, formerly Valero’s general counsel and now chairman, president and CEO of CST.

Bowers has plans for CST to get bigger.

The company’s largest store opens next month in Three Rivers in the heart of the Eagle Ford Shale. Eight new stores are planned for Canada.

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CST also will look to acquire smaller chains of 50 or fewer units in states contiguous to where it has locations now, according to documents it filed with regulators.

“It’s a market that’s structured for the big chains to be the survivors,” Bowers said.

About 80 percent of the nation’s 140,000 convenience stores are mom-and-pop businesses or small networks, and Bowers believes more small operators, who now rely on profit from fuel sales, will decide to bow out of the business. Fuel sales will be of dwindling importance as federal fuel-efficiency standards become more stringent.

“Over time, I do think we’ll see more (sites) come onto the market.”

Bowers, who was key in making acquisitions for Valero, said, “We’re in the right spot to take advantage of that.”

Heft will be important, because CST faces a range of competitors, including 7-Eleven Inc., Alimentation Couche-Tard Inc. (French for “night-owl food” and owner of Circle K stores), Casey’s General Stores, Susser Holdings’ Stripes stores, and a range of smaller competitors.

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Yet CST “will be a formidable competitor in new and existing markets,” as it upgrades sites and builds and acquires new stores, an editor at CSP Net, Convenience Store News’ online site, wrote this month.

While CST’s U.S. fuels margins can be volatile, they rose to almost 15 cents a gallon in 2012, up from 13 cents a gallon in 2011.

Until May 1, when the spinoff occurs, the business is “about moving fuel through our pumps,” Bower said. “Our food offering is strong, but it has sort of been a side note.”

Fuel will remain “very important,” Bowers said, “but it’s no longer the first priority.”

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Going forward, the key to boosting the bottom line for CST is a bigger focus on food. “The more we can do with food service the more profitability we bring to a store,” Bowers said.

“Food is the key” in the convenience store industry, said Michael Lawshe, president and founder of Paragon Solutions, an industry consulting and design firm based in Fort Worth. “There aren’t strong enough margins on the fuel side any more.”

Bigger stores help increase food sales, and CST is planning stores with more square footage.

CST’s average store occupies 2,200 square feet, but it’s building larger stores, ranging from 4,500 to 5,500 square feet. Thirty-six of the larger stores are under construction.

About 40 percent of the space in its larger stores is dedicated to food, Bower said. “The more we can grow our new stores and build new stores, the more we can grow our food program,” she said.

Roughly 60 percent of CST’s customers come to its stores to buy food or merchandise only, she said.

CST’s Fresh Choices, its private-label brand, is “a differentiator for us,” she said, while the company’s distribution center in Schertz ensures efficient delivery of a range of items, including water, energy drinks, chips, tea, lemonade and sandwiches.

Its Fresh Choices brand “started off with just bottled water, and it has grown to 185 items today,” she said.

The private-label items “help build customer loyalty,” she said, and are an aid in negotiating with suppliers.

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The private label “tells me how much it costs to make bottled water,” she said, “so when I go to Nestlé or other providers, I know what their cost structure is, and I can negotiate with better market knowledge.”

CST is racking up strong sales from what Bowers said are signature items, such as its kolaches (annual sales: 4 million) and its whoopie pies (1.3 million in annual sales).

“Our breakfast offering is robust,” she said. “We tend to do really well with the morning crowd. We’re working now to try to extend our offerings to the afternoon crowd.”

As CST builds new stores, Bower said customers will continue to see the Valero name, but “we’ll start positioning the Corner Store name a little more prominently.”

As CST grows, it will continue to have a relationship with Valero, North America’s largest independent refiner.

“We look forward to being a strong customer of Valero,” Bowers said. “We will be their largest wholesale customer by a factor of four.”

But with the separation, CST has the chance to offer other fuel brands, too. In the past, when Valero’s retail business examined an acquisition, “we had to build in to our bid process what it could cost to rebrand as Valero.”

As CST, it won’t have such constraints.

Should the company plan 10 new stores in Houston, for example, it will be able to approach Valero, or Exxon Mobil Corp. “or anybody else,” Bower said, “and ask what they can give us for a supply price.

“I think we’ll have more flexibility because of that.”