Valero's New View

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Valero's New View

In Valero Energy Corp.'s seven years as a retailer, the nation's third-largest refining and marketing company has poured hundreds of millions of dollars into developing its brand.

In that short time, the San Antonio-based company has built a strong retail division of nearly 1,000 company-operated convenience stores, which are a mix of smaller sites and traditional, older c-stores once belonging to ExxonMobil and Ultramar Diamond Shamrock, as well as a number of impressive 4,500-square-foot new builds.

Now, Valero is in the middle of seismic change in the way it goes to market. By cutting overhead costs, giving store managers flexibility to tailor product mix, building 5,500-square-foot Corner Stores and growing its private-label and food-to-go offers, Valero's retail division aims to position itself to be one of the most successful convenience retailers in the country.

"More and more, we are focusing on and investing in store operations, and reducing administrative and staff overhead," said Gary Arthur, senior vice president of retail for Valero Energy Corp. "We are emphasizing how we can better serve the customer, how we provide a better environment for our employees, and we are investing widely in the stores."

According to Arthur, Valero has been successful in growing its brand, and the improvements made so far have led to higher sales and gross profit dollars per store, as well as improved profitability. "But we realize we are in a highly competitive business that is impacted not only by other c-store competitors, but by drug, grocery and other retailers competing for the same customers," Arthur added. "We felt we needed to do more to ensure we remain successful in the long run."

An initial component of Valero's plan was the retail division's restructuring and the elimination of 130 jobs in the field and at corporate headquarters, including zone and area managers, field maintenance employees, merchandising coordinators, administrative support, and employees in the division's information technology, human resources and legal departments. (Some of those employees have moved to other areas of Valero's operations.)

"Previously, the retail division didn't have control over all of its overhead," Arthur explained. "Staff functions like accounting, information systems and human resources were provided at corporate level, and their respective staffing decisions were made and managed outside of our organization. We identified all of those support staff and decided to move it all into the retail domain so that we had complete control over the expenses of the business."

After running the numbers associated with those staffers, the retail division discovered just how substantial those expenses were. "We didn't feel we could compete effectively long-term with that kind of overhead," Arthur said. "That caused us to look at how we would restructure to reduce it."

The retail execs knew cutting jobs also meant finding ways to get the work done, reprioritizing tasks and deciding what work would continue and what functions had no added value.

"That is an ongoing process," Arthur said. "But it means doing more with less."

For example, the retail division is reducing its call center operating hours from 24/7 to 18/7. Calls from store employees received overnight will be processed by the company's Amarillo Credit Card Call Center, which is already staffed to handle customer calls. "We will be asking our field people to do more basic troubleshooting and other activities when the call center is not open," he noted. "But we believe we can make changes without affecting the store employees and giving them the support they need."

Store-level Control

Store employees will play an even more important role in Valero's future. The chain is decentralizing some of the decision-making, allowing store managers to have more autonomy in deciding the merchandise mix, retail pricing and promotions based on their knowledge of their customers.

"Invariably, when I ask store managers what they would do differently if they owned the store, they always have an idea about a product, repositioning items or being more or less aggressive in pricing on certain products," Arthur noted.

Valero's stores will still have a core set, but managers will be given more latitude when making product, service, price, placement or promotional decisions. "In the past, corporate picked the products and told the stores where to put it," Arthur said. "Now, if a store manager, working through the area manager, wants to put a different product on an end cap or give something an additional facing, he or she can."

To ensure they continue to meet vendor agreements, the stores will have a corporate set. "We don't want to lose any of the buying power of a national chain, but we can do that and create flexibility so that these store operators can make decisions to incrementally grow sales and profit dollars," Arthur said.

Later this year, the retail division will make changes in its manager incentive programs to better reward them for higher sales and gross profits.

Newer, Bigger Stores

One thing is certain: The stores, especially those being built now and in the future, will be selling more prepared foods in a more vibrant, larger setting. The retail initiative includes a new look for all of Valero's new stores -- one that can be scaled down and used over time to refresh or remodel existing units, some of which haven't seen an interior graphics change in eight years.

"If you don't remodel and re-image, you're done," Arthur said. "What people expect now from a c-store has changed. In the past couple of years, as we have invested in the stores to make them a better place to shop, our own customers' expectations have greatly changed. There are people now buying food in our stores who wouldn't have done so a few years ago. Now, we have to keep them interested."

To that end, Valero will build 100 stores in the next five years, most of which will be 5,500-square-foot stores built on nearly 2-acre lots, or a scaled-back 4,000 square feet in some markets. The new stores are an increase from the 3,500- to 4,500-square-foot stores the chain has built in the past few years and more than double Valero's average store size of 2,200 square feet.

More than 40 percent of the floor space will be devoted to foodservice, specifically Valero's upgraded Javalero coffee, fountain, sandwich and hot foods programs. Today, Valero Corner Stores serve more than 800,000 customers each day. With many relatively small existing stores, the chain underindexes the industry in food sales.

"With larger-format stores, we can do even more with our foodservice," Arthur said. "As we've seen, people who buy food have higher average rings and shop more frequently in the store."

Valero's focus will continue to be on immediate consumables, but Arthur said he doesn't want to be limited in any way. "We know there are consumers we touch on the way home. We're exploring the idea of foods they can serve to their family. That's why larger-format stores are so important. We simply don't have room to explore those kinds of programs in a smaller store."

Valero's private-label, Fresh Choices line will also be featured prominently in the stores. (For more on Valero's private-label program, see "Cracking the Private Label Code" in the July 16 issue.) Including foodservice items, the chain has nearly 100 SKUs of proprietary products.

Outside, the new stores will feature 10 to 12 gasoline pumps, up from the eight or more installed in recent new builds and double the chain average of five pumps.

To support its new-store plans, Valero is aggressively building up a real estate bank. "We will be ramping up to 20 to 25 new stores a year," Arthur said, adding that he expects 20 of the larger-format units to be built next year. The first, in San Antonio, will be followed by stores in nearly every Valero market. The heaviest concentration will be in San Antonio, Dallas-Fort Worth, and Houston, Texas, as well as Tucson and Phoenix, Ariz. Other areas that will see new Valero stores include Denver; Albuquerque, N.M.; El Paso, Texas; and south and central Texas. With this game plan in place, Valero's retail executives have no intention of following in many of the major oil companies' footsteps and moving away from its company-operated store strategy. "Having company-operated stores benefits the brand. We have control over operations and how we touch our customers," Arthur said. "It can be a challenge to maintain standards when employees don't directly report to you."

With Valero making more than 1 million barrels of gasoline a day, having 120,000 barrels a day moving through its own retail sites, the retail division is the biggest customer for Valero's refining division. "There is an intrinsic value for the refinery in our having company-operated stores," Arthur said. "We can move those barrels and it is the retail division's job to do that, adding value compared to the alternative of selling Valero's gasoline on the spot market."

Indeed, while the retail division has more control over its overhead now, and may be a bit more independent than other retail arms of large refiner/marketers, Arthur said his colleagues have "done a good job" of integrating with the corporate culture of Valero Energy, which emphasizes commitment to the community, caring about employees and volunteerism.

"I think our retail organization is perfectly aligned with our corporate culture," he said. "There is no big division between our goals and the goals of Valero Energy. There is a recognition in our retail division that Valero is refining-centric and the bulk of our corporate income comes from refining, and that is where the bulk of capital investment goes. But we see ourselves as capable of being a meaningful contributor to the bottom line and an important contributor to the company's image, in both the public domain and the investment community. To the consuming public, we are Valero, and we take the responsibility of representing the company in a positive manner seriously."

With its new initiatives taking off, Arthur said, the retail division will "do what we need to do to be not just competitive, but successful and recognized as a leader in the c-store industry."