In retail circles, ask anyone to name the leading fuel distributors in their markets. In previous years, you would have heard names like Citgo and Texaco. Not so much anymore. The most talked about brand these days is Valero Energy Corp., and with good reason: the San Antonio-based marketer is a brand on the move with the financial portfolio, executive leadership and refining and marketing infrastructure to compete toe-to-toe with any Big Oil company in the business.

In honor of its outstanding growth over the past decade, Convenience Store Decisions is proud to name Valero as its 2006 Chain of the Year.

A virtual unknown in the downstream petroleum business in 2000, Valero has grown into the largest refiner in North America. The independent oil company received its big break from Exxon Corp. in 2000. As a condition of its planned acquisition of Mobil Oil Co., Exxon was forced to unload its California assets, which included the prized Benicia refinery and 80 convenience stores and gas stations. Valero’s bid wasn’t the highest, or even the second highest, but in this instance, finishing third was good enough for the gold.

“Following my conversations with Exxon, they made it clear that money wasn’t the only issue they would consider when selling Benicia,” said Valero’s Chairman/visionary Bill Greehey. “Of equal consideration was the company’s safety and environmental record, commitment to employees and dedication to the community. In these areas we had everyone else beat.”

It turned out to be Valero’s watershed moment. Within two years of the Benicia deal, the company began shedding its natural gas interests to fund additional refinery acquisitions, which included the 2001 acquisition of Ultramar Diamond Shamrock (UDS) and the 2005 deal to acquire Premcor Inc.

Growing a Brand
Like the Big Oil firms it is competing against, one of Valero’s top priorities is to increase distribution points and sell more fuel products. As a result, it has been aggressively seeking new retail partners. To make its program more attractive, it is stepping up its rebranding incentive programs.

“We cover the full cost of changing to our image,” said Ken Applegate, Valero’s vice president of wholesale marketing. “In some cases we will manage that work, or, if the distributor prefers, we will allow them to do it as well. Like our competitors, we do offer incentives, such as fuel discounts. We view our program as competitive across all metrics—a very competitive satellite offering and a proprietary credit card backed by our credit-card processing center in Amarillo, Texas.”

Valero has also rolled out a fleet fueling program and gift cards, which cater to vastly different demographics and help increase the brand’s allure to new consumers.

“Our goal is to have the marketers observe all the brand support to let them know we intend to be not just competitive, but aggressive in the market,” Applegate said.

The company follows one of two models. The first is the owner/operator, which consists of convenience store chains like L’il Cricket and Fas Mart (see company profiles on pgs. 36 and 40).

“We have a number of partners who serve as their own distributor into their own sites,” Applegate said. “In some cases they also distribute either Valero product or unbranded to other independent operators in the market.”

The other model is the jobberships who attract dealers to the Valero program. These represent the majority of the sites that have been brought into the network.

Fuel supply is one area where Valero has an edge over its competitors. Beginning with the acquisition of three refineries from Basis Petroleum in 1997 and culminating with last year’s deal for Premcor Inc., Valero is easily the largest refiner in North America with a throughput capacity of approximately 3.3 million barrels per day. It operates a geographically diverse marketing network that includes 18 refineries and stretches across the U.S., Canada and the Caribbean.

Plus, Valero has an interest in a limited partnership, which operates 9,243 miles of pipeline, 88 terminal facilities and four crude oil storage plants. These facilities complement its refining and marketing assets in the U.S., and helps the company efficiently supply its network of 5,500 convenience stores and gas stations, which operate under the Valero, Diamond Shamrock, Shamrock, Ultramar and Beacon brand names. About 1,000 of the stores are company-owned and operate under the Corner Store convenience store brand.

A People Company
As Valero has grown, so has its commitment to hiring and retaining good people—certainly not an easy task when you have 22,000 employees on the payroll.

“From day one, employees were our top priority,” Greehey said. “We recognized we would go only as far as our employees would take us so we invested in a culture of rewarding personnel for their service and constantly reinforcing their value to the company. As we acquired chains like Ultramar Diamond Shamrock, we carried over that culture and found it was contagious.”

Like Greehey, Valero’s Senior Vice President of Retail and Specialty Products Marketing Gary Arthur said its employees have helped bring about the many improvements in Valero’s retail network over the past few years. “In convenience retailing, employees are the key to an operation’s success. Since they interact with customers on a daily basis, it’s important that our retail employees enjoy their jobs. Happy, satisfied people provide better customer service, which in turn is good for business,” he said. “We offer best-in-industry pay, bonuses and benefits, as well as excellent training and development programs. Through our network investment program, we have also made our stores a safer and more attractive place, not only to shop, but to work as well. As a result, our retail employee turnover rate is among the best in its class.”

Valero carries this “employee first” culture over to its refineries as well, and, in some cases, it did so in a hurry. At its Port Arthur refinery, which was ravaged by Hurricane Rita, the plant had only been acquired from Premcor three weeks earlier. As the storms rained down on the facility—just weeks after Hurricane Katrina pounded its Lake Charles, La. refinery—the company found desperate employees in a desperate situation. While still unfamiliar with the names of many of the people working at the plant, Valero moved swiftly to provide food and shelter for the newest members of its team. The result was that employees had the refinery quickly back online (see Human Resources story, p. 28).

Managing a large workforce, like the one at Lake Charles, requires its own dedicated staff. “Valero has an outstanding corporate and field human resources staff that is well trained to meet the overall needs of the company, as well as the individual needs of our employees,” Arthur said. “Our management team works closely with our HR staff to ensure that company policies are met while, at the same time, remaining sensitive to the employee’s needs.”

Growing Retail Operations
After acquiring UDS, Valero developed a network optimization plan aimed at taking a step back in order to move forward. “Our plan was to divest poor performing, non-strategic assets and invest in long-term competitiveness,” said Arthur. “Our focus has been to invest in upgrading our network, which has provided a platform for developing a variety of successful customer programs, such as an expanded coffee, fountain and sandwich programs; augmented foodservice; and consumer value-driven proprietary product launches. Because of these programs, we’ve been able to leverage the investment upgrades and n
ew store design.”

Combined with the development of its distinctive teal and yellow retail image and a new company logo, Valero has been honing its in-store skills with the development of the Fresh Choices food brand and a mammoth Retail Distribution Center in Texas.

Fresh Choices is an upscale line of products featuring grab-and-go sandwiches and wraps, salads, chips, sodas and bottled water. The brands signage carries over in the convenience stores to its Javalero coffee program, soda fountain and other foodservice areas. The products are available in all 980 of Valero’s company-owned convenience stores.

“Fresh Choices is helping us distinguish our retail brand in the market place and gives customers another reason to rely on Valero for their daily convenience store needs,” Arthur said. “The key is offering quality products that also delivers real value that customers can afford every day.”

In 2005, Valero’s retail program received a significant boost when it opened its 132,000-square-foot Retail Distribution Center (RDC) in San Antonio that warehouses 2,500 different items to supply the chain’s 600 Texas-based stores. This facility, which is supplied by South San Francisco, Calif.-based Core-Mark, has improved efficiencies in Valero’s retail network providing operational flexibility in serving its Texas stores, as well as providing the capability to offer a variety of new products to consumers.

“Since we are bringing products into a central distribution point, we’re finding fewer out of stocks, we’re finding fresher products in the stores and our managers are able to order things in lower quantities with greater frequency,” said Hal Adams, Valero’s vice president of merchandising. “This reduces the capital we have tied up in inventory sitting on store shelves.”

The company has been spending quite a bit of time gleaning new ideas from other trade channels, such as how drug stores layout the front end to boost impulse sales or how mass merchandisers market high-margin general merchandise.

“I am very much in tune with how Walgreens can move in and out of seasonal products and new merchandise without a hitch, or how Target can trigger impulse sales at different parts of the store,” Adams said. “At the end of the day, we make our bread and butter by increasing impulse sales and mixing in popular new items like flowers, DVDs and CDs. Anything that we can add on to that sale we’re going to look at, and having the Retail Distribution Center gives us that advantage.”

Another tremendous challenge Adams is facing is moving customers from the pumps into the convenience store. “We know about 45% of our customers only buy fuel and never come into our store. This presents an enormous growth opportunity right from customers already on the lot,” he said.

One example Adams cited for moving customers inside the store is emphasizing price and value by using outdoor displays and pumptoppers. It’s particularly effective in attracting the sought-after female demographic by squashing the perception of the “over-priced” convenience store.

“It’s a halo effect we learned from observing Best Buy,” Adams said. “Best Buy promotes six or seven items inside the store as a value offering. This gives customers a comfort level that everything else must be a good deal, too. There’s no way consumers will keep track of good deals on everyone of those items, but if you price certain items in the store correctly, that’s going to give the customer comfort that its price must be fair on everything else.”

“We have made our stores a safer and more attractive place, not only to shop, but to work as well” — Gary Arthur, Valero’s senior vice president of retail and specialty products marketing

Future Planning
When evaluating a property for a convenience store, Valero looks at several key factors before deciding whether to build a new unit or to pass on the location. First, Arthur said, the company takes into consideration the market and determines if it’s one it wants to grow in. Then it looks at the location and considers the following:

• Area growth projections;
• Existing and future traffic patterns;
• Competitive factors;
• Micro-market demographics;
• How well the site complements the existing network;
• The physical characteristics of the lot (size, topography, etc.);
• Getting permits within a reasonable timeframe;
• The size of the store and attributes needed to make it successful; and, of course,
• The capital required to buy the land and develop the project, and the overall return projections.

In terms of site count and geographic-expansion, Valero’s most dramatic growth has occurred in its branded wholesale network, an area it expects to keep growing.

“We have been aggressively expanding our branded wholesale network along the East Coast, adding new locations in the Mid-Continent and West Coast, and charting new territory in the Great Lakes region,” Applegate said. “We believe the Valero brand has been so well received because of our tremendous supply capabilities, great brand image and competitive offering.”

Going forward, one of the most pressing concerns Valero faces is the continued encroachment on convenience from other retail channels.

“Margin compression on fuel and merchandise is a big challenge for our industry,” Arthur said. “The competitive pressures from drug, big box and other retailers, as well as rising costs, particularly in the areas of credit card fees and labor, are definitely putting a squeeze on margins.”

Competitive pressures aside, Valero’s focus is on expansion. “In this business, you keep growing or you become stale and let others pass you by. We have the experience and financial stability to keep our network strong and vibrant,” Arthur said. “That’s what the industry and our consumers can expect from Valero.”