i'm betting chase wins the new contract next year.
Am Ex-Costco Divorce Shakes Up Card Industry
Costco Cards Account for One Out of Every 10 AmEx Cards in Circulation
By
Robin Sidel
Updated Feb. 12, 2015 8:20 p.m. ET
125 COMMENTS
American Express Co. and Costco Wholesale Corp. are ending their 16-year relationship, a surprise move that pummeled AmEx’s stock price and will trigger a major upheaval in the card industry.
The unusual partnership, in which Costco exclusively accepted AmEx cards, had driven a significant chunk of business to the New York card company. In addition, AmEx and Costco issued a credit card together that could also be used at other merchants. When the arrangement ends next year, millions of customers will be forced to use a different credit card when shopping at the wholesale store.
The failure to agree on new terms was a fresh blow to AmEx, which was already falling short of some sales targets. American Express Chief Executive Ken Chenault said the move, affecting roughly one in 10 AmEx cards in circulation, would eat into the company’s results in the next two years.
On Thursday, AmEx’s shares dropped $5.53, or 6.4%, to $80.48, its largest one-day percentage decline since August 2011.
The move sets up a race among credit-card firms to team up with the fast-expanding wholesale club, which sells everything from car tires to smoked salmon.
AmEx, which issues credit and charge cards and owns aprocessing network, said it had been unable to reach a new agreement with Costco on terms that “would have made economic sense” for the company.
What It Means for Costco Shoppers
ENLARGE
Illustration: Bloomberg
Attention Costco shoppers: You will soon need to use a different credit card at the warehouse club. Costco won’t accept American Express cards after March 31, 2016, and customers with the “co-branded” TrueEarnings Costco-AmEx card won’t be able to use it anywhere else either. Read more on MoneyBeat
“It’s not easy to see a long-standing partnership end, but when the numbers no longer add up it’s the only sensible outcome,” Mr. Chenault said in a conference call with analysts.
Mr. Chenault said the move would have a negative impact on revenue and earnings per share in 2015 and 2016. Mr. Chenault said he is confident that the company will be able to achieve its earnings-per-share growth target of 12% to 15% in the “moderate to long term” without the Costco arrangement.
AmEx approached Costco several months ago to renew the relationship, prompting the wholesale club to open up the process to other potential partners, according to a person familiar with the discussions. Costco had sought more favorable terms from AmEx, the person said.
Costco is evaluating plans for a new partner, according to other people familiar with the situation. Card-issuing banks J.P. Morgan Chase & Co. and Citigroup Inc. are vying for the rights to offer Costco’s co-branded cards, these people said. It isn’t clear if Costco will accept multiple brands like Visa and MasterCard, as most merchants do, or stick with a one-brand strategy.
A spokesman for Costco declined to comment.
Costco’s push for better terms highlights the firm’s increasing clout. The company, which started its membership-only warehouse business in Seattle in 1983, has expanded to 671 locations around the world and is now the second-largest retailer in the U.S., behind Wal-Mart Stores Inc.
Costco’s formula of selling bulk-sized containers of everything from artichoke hearts to multipacks of chicken thighs drew shoppers even as many other retailers faced slumping sales and slowing traffic.
In the past decade, Costco has more than doubled its annual revenue to $112.6 billion for the fiscal year ended Aug. 31 and nearly doubled profits to $2.06 billion.
Throughout that time, customers couldn’t make purchases with credit cards branded by Visa Inc., MasterCard Inc. and Discover Financial Services. Costco, however, does accept debit cards from Visa and MasterCard.
That exclusive arrangement is rare. One of the other exceptions to broad-based acceptance is Sam’s Club, a unit of Wal-Mart that doesn’t accept Visa or AmEx credit cards in its stores.
AmEx said its pact with Costco would end on March 31, 2016. AmEx will discontinue its TrueEarnings cards that are branded with the Costco logo and offer new types of cards to those customers.
AmEx will pursue efforts to persuade the holders of the Costco branded cards to use its other cards. Mr. Chenault said that about 70% of spending on the AmEx-Costco-branded cards is done in places other than at the warehouse club.
“They are AmEx customers as much as they are Costco customers,” Mr. Chenault said.
The end of the Costco relationship represents the latest setback for AmEx, which once was known as a status symbol for the affluent but is now under attack from competitors like J.P. Morgan that are also going after wealthy Americans. AmEx is now trying to expand into other areas, such as pitching prepaid cards for low-end consumers, but that strategy will likely take years to pay off. AmEx is also trying to get more small businesses to accept its cards.
Costco has long been one of AmEx’s biggest partners. AmEx also has a major branding agreement with Delta Air Lines Inc., which it renewed last month.
Such partnerships, called “co-brands,” are established to build loyalty among specific types of customers. Cardholders often receive extra perks when they use co-branded cards, while card companies and the merchant typically see higher levels of spending on those cards. Most such deals, however, don’t require merchants to exclusively accept those cards.
AmEx’s partnership with JetBlue Airways Corp. is set to expire soon, but that is a far smaller relationship than Costco or Delta, according to a person familiar with the arrangements. It isn’t clear if that pact will be renewed or if JetBlue will find another partner.
The dissolution of the partnership comes just a few months after AmEx and Costco ended a similar arrangement in Canada. Costco now has a partnership in Canada with MasterCard and Capital One Financial Corp.
Energy consultant Steve Drinkwater of Vancouver, British Columbia, Canada, said he was disappointed when he was forced to give up his AmEx-Costco card last year. AmEx wooed him with a new card that had a cash-back offer, but he said the card is now less appealing since that six-month offer expired. He also isn’t interested in the new Canadian Costco card from Capital One.
“I’m not too sure what I’m going to do. I may just use my debit card,” he said.
Mr. Chenault said the end of the Costco deal could help raise AmEx’s discount rate, which is the amount that merchants pay for each transaction. Co-branded partnerships typically give the merchant a break on that rate as part of an incentive for doing the deal.
AmEx announced last month that it was eliminating 4,000 jobs. The move came as part of an effort to control expenses amid a shortfall in revenue.
—Kate Linebaugh contributed to this article.
http://www.wsj.com/articles/american-express-to-lose-costco-exclusivity-1423746408
Am Ex-Costco Divorce Shakes Up Card Industry
Costco Cards Account for One Out of Every 10 AmEx Cards in Circulation
By
Robin Sidel
Updated Feb. 12, 2015 8:20 p.m. ET
125 COMMENTS
American Express Co. and Costco Wholesale Corp. are ending their 16-year relationship, a surprise move that pummeled AmEx’s stock price and will trigger a major upheaval in the card industry.
The unusual partnership, in which Costco exclusively accepted AmEx cards, had driven a significant chunk of business to the New York card company. In addition, AmEx and Costco issued a credit card together that could also be used at other merchants. When the arrangement ends next year, millions of customers will be forced to use a different credit card when shopping at the wholesale store.
The failure to agree on new terms was a fresh blow to AmEx, which was already falling short of some sales targets. American Express Chief Executive Ken Chenault said the move, affecting roughly one in 10 AmEx cards in circulation, would eat into the company’s results in the next two years.
On Thursday, AmEx’s shares dropped $5.53, or 6.4%, to $80.48, its largest one-day percentage decline since August 2011.
The move sets up a race among credit-card firms to team up with the fast-expanding wholesale club, which sells everything from car tires to smoked salmon.
AmEx, which issues credit and charge cards and owns aprocessing network, said it had been unable to reach a new agreement with Costco on terms that “would have made economic sense” for the company.
What It Means for Costco Shoppers
Illustration: Bloomberg
Attention Costco shoppers: You will soon need to use a different credit card at the warehouse club. Costco won’t accept American Express cards after March 31, 2016, and customers with the “co-branded” TrueEarnings Costco-AmEx card won’t be able to use it anywhere else either. Read more on MoneyBeat
“It’s not easy to see a long-standing partnership end, but when the numbers no longer add up it’s the only sensible outcome,” Mr. Chenault said in a conference call with analysts.
Mr. Chenault said the move would have a negative impact on revenue and earnings per share in 2015 and 2016. Mr. Chenault said he is confident that the company will be able to achieve its earnings-per-share growth target of 12% to 15% in the “moderate to long term” without the Costco arrangement.
AmEx approached Costco several months ago to renew the relationship, prompting the wholesale club to open up the process to other potential partners, according to a person familiar with the discussions. Costco had sought more favorable terms from AmEx, the person said.
Costco is evaluating plans for a new partner, according to other people familiar with the situation. Card-issuing banks J.P. Morgan Chase & Co. and Citigroup Inc. are vying for the rights to offer Costco’s co-branded cards, these people said. It isn’t clear if Costco will accept multiple brands like Visa and MasterCard, as most merchants do, or stick with a one-brand strategy.
A spokesman for Costco declined to comment.
Costco’s push for better terms highlights the firm’s increasing clout. The company, which started its membership-only warehouse business in Seattle in 1983, has expanded to 671 locations around the world and is now the second-largest retailer in the U.S., behind Wal-Mart Stores Inc.
Costco’s formula of selling bulk-sized containers of everything from artichoke hearts to multipacks of chicken thighs drew shoppers even as many other retailers faced slumping sales and slowing traffic.
In the past decade, Costco has more than doubled its annual revenue to $112.6 billion for the fiscal year ended Aug. 31 and nearly doubled profits to $2.06 billion.
Throughout that time, customers couldn’t make purchases with credit cards branded by Visa Inc., MasterCard Inc. and Discover Financial Services. Costco, however, does accept debit cards from Visa and MasterCard.
That exclusive arrangement is rare. One of the other exceptions to broad-based acceptance is Sam’s Club, a unit of Wal-Mart that doesn’t accept Visa or AmEx credit cards in its stores.
AmEx said its pact with Costco would end on March 31, 2016. AmEx will discontinue its TrueEarnings cards that are branded with the Costco logo and offer new types of cards to those customers.
AmEx will pursue efforts to persuade the holders of the Costco branded cards to use its other cards. Mr. Chenault said that about 70% of spending on the AmEx-Costco-branded cards is done in places other than at the warehouse club.
“They are AmEx customers as much as they are Costco customers,” Mr. Chenault said.
The end of the Costco relationship represents the latest setback for AmEx, which once was known as a status symbol for the affluent but is now under attack from competitors like J.P. Morgan that are also going after wealthy Americans. AmEx is now trying to expand into other areas, such as pitching prepaid cards for low-end consumers, but that strategy will likely take years to pay off. AmEx is also trying to get more small businesses to accept its cards.
Costco has long been one of AmEx’s biggest partners. AmEx also has a major branding agreement with Delta Air Lines Inc., which it renewed last month.
Such partnerships, called “co-brands,” are established to build loyalty among specific types of customers. Cardholders often receive extra perks when they use co-branded cards, while card companies and the merchant typically see higher levels of spending on those cards. Most such deals, however, don’t require merchants to exclusively accept those cards.
AmEx’s partnership with JetBlue Airways Corp. is set to expire soon, but that is a far smaller relationship than Costco or Delta, according to a person familiar with the arrangements. It isn’t clear if that pact will be renewed or if JetBlue will find another partner.
The dissolution of the partnership comes just a few months after AmEx and Costco ended a similar arrangement in Canada. Costco now has a partnership in Canada with MasterCard and Capital One Financial Corp.
Energy consultant Steve Drinkwater of Vancouver, British Columbia, Canada, said he was disappointed when he was forced to give up his AmEx-Costco card last year. AmEx wooed him with a new card that had a cash-back offer, but he said the card is now less appealing since that six-month offer expired. He also isn’t interested in the new Canadian Costco card from Capital One.
“I’m not too sure what I’m going to do. I may just use my debit card,” he said.
Mr. Chenault said the end of the Costco deal could help raise AmEx’s discount rate, which is the amount that merchants pay for each transaction. Co-branded partnerships typically give the merchant a break on that rate as part of an incentive for doing the deal.
AmEx announced last month that it was eliminating 4,000 jobs. The move came as part of an effort to control expenses amid a shortfall in revenue.
—Kate Linebaugh contributed to this article.
http://www.wsj.com/articles/american-express-to-lose-costco-exclusivity-1423746408
