What Happened Between Costco and American Express in 2016?

In 2016, Costco started issuing new Visa credit and debit cards to their consumers. Customers who previously had Costco cards from American Express after June 20th, 2016 were unable to use them anymore.

Citi spokeswoman stated that all Costco cardholders must have new cards after June 2016.

Investors and consumers were concerned when Costco and AmEx announced in 2016 that they would end their 16-year-old exclusive partnership.

The stock of the credit-card company plunged 6.4% after it was announced about the relationship. It was the largest percentage drop in one day after August 2011.

Cardholders were worried. Although Costco offers a wide range of deals, the average cost their payment transactions can be quite high, and credit cards offer more flexibility and convenience than cash as compared to a debit card.

Costco announced that Visa would replace AmEx. It was scheduled to take effect in spring 2016. Also, announced was that Citigroup would become the special issuer for Costco’s credit card cards. It led to an increase in both Citigroup and Visa share prices.

This timeline was slightly extended, and Costco now accepts Visa cards, checks, and cash.

Citi said that new Costco consumers looking to get Costco Visa Card were able to do so after June 2016.

Eric Wasserstrom, managing director of Guggenheim Securities LLC and AmEx, stated that for some consumers, American Express’s special relationship with Costco was one of the reasons they were able to obtain an AmEx card.

It wasn’t the first split between a retailer and credit-card issuing network.

Wal-Mart changed their branded credit cards in 2014 to MasterCard from Discover. Capital One also sold its Best Buy credit-card portfolio to Citigroup in 2013. Best Buy switched their credit-card issuing company to Visa from MasterCard after that.

Matt Schulz, a senior industry analyst, stated that people are very loyal to brands and tend to keep their cards for a lengthy period of time. AmEx has maintained that kind of brand loyalty for years as compared to other credit card issuers. People who have an American Express card typically prefer to us that and when any change occurs, it can be troublesome.

American Express management was directly responsible for this mess. American Express management created large customer concentrations and ignored the risks. Due to this, the company lost over $40 billion in shareholder value when key customers left the company.

AmEx Had Too Many Eggs in One Basket

American Express announced the end of its Costco partnership in 2016. Management informed shareholders that 10% of the 112,000,000 American Express cards in circulation had been co-branded with Costco when it first made the announcement. This was an astonishing concentration for a company with American Express’s sophistication and size.

Credit Suisse’s analyst looked deeper into American Express’ data and found that 23% of Amex card purchases were made on co-branded cards. Market participants immediately asked if these customers were loyal to American Express or were choosing to spend due to loyalty to Delta (NYSE/DAL), JetBlue (NASDAQ/JBLU), Starwood Hotels, and other co-branded partners.

Over-dependence on a few customers can lead to customers leaving and taking a large percentage of revenue. The risks to their business, such as what Costco and AmEx experienced last year, were significant.

American Express’ co-branded business was already in trouble after the Costco split. Soon after, JetBlue, another major partner in co-branding, announced that they would be shifting their card business from American Express to MasterCard (NYSE.MA) and Barclays. The exodus continued in January when Fidelity, a co-branded card with American Express, switched to Visa.

As one would expect, given amount of business they received from these partners, the company’s revenues suffered from the losses. American Express’ revenue declined significantly in the past five years, despite steadily growing quarterly revenues. American Express’ quarterly revenue has fallen nearly 11% since its peak in 2014’s fourth quarter.

While American Express suffered declines in revenue and stock price from 2014-2016, it began to rebound in the fall of 2016 and has marched higher since, advancing to record highs in 2021.

American Express’ management made it too dependent on a few co-branded card partnerships. The benefits from this strategy were temporary and outweighed by the concentration risks. Some of these risks still exist today, even though Costco, Fidelity, and JetBlue are no longer partners.

Marriott acquired Starwood Hotels in April 2018. Marriott is currently a partner with JPMorgan Chase to offer its co-branded credit card cards. While there seems to be risk, Marriot still offers a Bonvoy American Express Card in 2021.

Finding the Silver Lining in This Mess

American Express and its shareholders have had to leave Costco. But, all is not lost.

American Express reported a 25% return on equity in 2015, which was profitable. It was higher than Visa’s 22.1% but lower than MasterCard’s amazing 59%. The balance sheet of the company is strong from both capital and liquidity perspectives..

American Express remains a favorite of high-net-worth clients despite increased competition. According to the Nilson Report, American Express customers spend an average of $144 per purchase, which is significantly more than the $84 average for Visa cards and $90 at MasterCard.

In late 2014, the company signed a six-year extension to its largest co-branded airline partner Delta. It is a win for the company in the short term. It does not change American Express’ dependence on a handful of co-branded partners. Before the Costco partnership collapsed, about 5% of card spending was accounted for by Delta co-branded cards. 

Every company must find ways of diversifying its customer base and reducing customer concentration risk. American Express failed to recognize this basic principle and has been harmed by its competitors who have taken their key customers.

Despite these missteps, American Express appears to have rebounded nicely and has a strong and thriving business today.

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