Back on Course

By JAMES F. PELTZ

July 25, 1997 12 AM PT

TIMES STAFF WRITER

American Express Co., once in danger of becoming a relic of the 1980s, when its gold charge card helped symbolize conspicuous spending, is proving that its cards and other financial services remain very much in demand.

Earnings, stock price and shareholder returns at the company are in their third straight year of growth after slumping badly in the early 1990s. Renewed strength in its flagship credit-card business, its burgeoning investment-services group, international growth and a massive overhaul of the company’s operations have all lifted the results.

In particular, the company seems to have finally arrested the decline in its share of the U.S. credit-card business. Thanks to aggressive marketing tactics, more people are using its cards, card members are spending more, more stores are accepting its cards and American Express is trotting out new types of cards aimed at specific groups of consumers.

For example, in just one year the new SkyMiles card, a partnership with Delta Air Lines, has become the second most widely held co-branded card involving an airline, behind the Citibank-American Airlines card, said Randy Petersen, publisher of the industry newsletter Inside Flyer.

“It’s one of the brightest marketing things both [American Express and Delta] have ever done,” he said. Delta is also a key partner in the company’s older but more flexible “Mileage Rewards” incentive program.

American Express also has grabbed for more market share by waiving or paring its fees on some cards--as of March 31, the average annual fee for all its cards was $39, down 11% from $44 a year earlier--and shaving prices it charges store owners to accept its cards.

Since 1993, when Chairman Harvey Golub took over for ousted James Robinson III, the number of American Express cardholders has grown to 42 million from 26 million. Total charge volume has jumped 49% in the period, to $184 billion in 1996.

That translated into a 15% gain in first-quarter profit this year and a 7% increase in revenue, both “quite strong relative to other financial services companies,” said analyst Susan Roth of Donaldson, Lufkin & Jenrette Securities.

Next week, American Express is expected to post another solid earnings gain for the second quarter.

The upswing illustrates how the New York-based concern is shedding the arrogant, lumbering ways that derailed its growth in the early 1990s.

In credit cards, especially, American Express has become more innovative in marketing its cards in the face of torrid competition from the industry’s twin titans, Visa and MasterCard. Over the last decade, the two market leaders slashed fees and interest rates, prompting many consumers to question paying $35 or more in annual fees to carry an American Express card. The company also let early co-branding card deals with AT&T; and American Airlines slip away.

“We’re not going to let people push us around anymore,” Thomas Ryder, head of American Express’ international travel-services group, said in a telephone interview. “This is a place that’s now fully committed to kicking ass and taking names.”

(American Express’ green, gold and platinum cards are “charge” cards, in that their balances must be paid in full each month. But American Express also issues conventional “credit” cards under the Optima name.)

American Express once was a dominant player in plastic spending; a decade ago it had more than one-quarter of the market for general-purpose card spending, and its gold card became synonymous with free-spending yuppies in the 1980s.

By the end of 1995, however, its share had tumbled to 19.2%, less than half the 46.6% share garnered by industry leader Visa, according to the Nilson Report, a research firm in Oxnard.

But last year, American Express’ share finally edged back up, to 19.6%. In the United States, where mailboxes stuffed with new-card offers illustrate the saturation of the credit card business, “stealing market share [from others] is the name of the game,” said Bruce Brittain, whose Brittain Associates in Atlanta tracks the industry.

To be sure, American Express is still a work in progress. Its revenue is growing less than 10% a year and is vulnerable if the economy sours. The company’s costs remain too high, even though it’s slashed 10,000 jobs in the last three years. One of its trademark consumer products, travelers checks, is a profitable but no-growth business. And earlier this month, American Express said its much-touted effort to enter the discount stock-brokerage business had flopped.

“It’s going to be a struggle” for American Express to grow faster, said Lehman Bros. analyst Thomas Facciola. “About 30% of the company’s business has 0% growth rates. You have to make the other 70% work twice as hard.”

So American Express also is pushing hard overseas, where credit-card use is growing faster. (Visa and MasterCard are doing the same, naturally.)

International card revenue accounts for one-third of American Express’ total revenue; the company wants that figure to reach 50%.

To get there, American Express is abandoning its tradition of being the sole issuer of its cards. It’s inviting foreign banks to issue its plastic, and so far about 20 banks have signed up in Brazil, Israel and other countries.

American Express wants to do the same in the U.S. but is stalled by Visa and MasterCard exclusivity bylaws, although the Justice Department is reviewing such agreements.

Regardless, American Express also is getting strong support from its Financial Advisors money-management group, which is built around the company’s former Investors Diversified Services unit. Riding the bull market, the group is pocketing surging fees from sales of mutual funds, annuities and the like.

The result: American Express’ 1996 profit (excluding one-time items) rose 11% from the year before, to $1.7 billion on revenue of $16.2 billion. Earnings amounted to 23 cents per each dollar of its stockholders’ investment, a fourfold increase from 1992.

Its stock has soared 88% in just the last 12 months and has nearly tripled over the last three years, to a close of $79.63 a share Thursday on the New York Stock Exchange. As such, American Express is another big score for famed investor Warren Buffett, whose Berkshire Hathaway Inc. owns a 10% stake in the company.

Part of the stock’s rise stems from recurrent takeover speculation, such as reports last year that the company and banking giant Citicorp held unsuccessful merger talks.

In addition to the credit card missteps, American Express and former Chairman Robinson were distracted for several years when they tried to build a financial “supermarket” where consumers could transact all their financial business under one roof.

But consumers didn’t want or need such a place, and the programs withered.

This led to Robinson’s departure in favor of Golub, who spearheaded the more recent marketing moves.

The growing number of places accepting credit cards also gives American Express another shot at catching up.

“Three years ago in California you couldn’t use credit cards to shop in supermarkets, and now it’s hard to find a supermarket where you can’t use your card,” Ryder said. “What’s developing is the means for people to use their cards in more places.”

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TAKING CHARGE

American Express Co. is making a comeback from its slump in the early 1990s, largely because its charge and credit cards are starting to reverse a steep slide in market share.

Market Share is Off From a Decade Ago...

Percentage of total U.S. general-purpose card spending*

1996

Visa: 46.6%

MasterCard: 26.1%

American Express: 19.6%

Discover: 6.4%

Diner’s Club: 1.3%

1985

Visa: 43.3%

MasterCard: 29.0%

American Express: 25.6%