Costco near deal with new credit card issuer
NEW YORK — Costco Wholesale Corp., acknowledging its split with American Express Co., said Friday that it is close to reaching a deal with a new credit card company for exclusive rights to serve the giant retailer’s customers.
Costco should be in a position to announce the new partner “probably sooner rather than later,” said spokesman Bob Nelson, raising the possibility that could happen as early as next week.
The company, based in Issaquah, Wash., east of Seattle, has been talking with several credit card firms for some time in anticipation of a break with AmEx, Nelson said. Last fall, Costco ended its partnership with AmEx in Canada, choosing instead a Capital One MasterCard.
Costco’s efforts to hook up with a lower-cost credit card company have rattled some of its U.S. customers.
“It’s the only reason I have an American Express card,” Tim Young said Friday outside a Costco store in San Juan Capistrano, where he had put his car through the store’s $7.99 carwash and picked up a few odds and ends inside.
As usual, Young said, his purchases included something he had not planned to buy — a pair of jeans he had decided, on the spur of the moment, that his teenage son could use — ratcheting the bill a bit higher.
For the last 15 years, AmEx has been the only credit card accepted at Costco, a membership-only business with 50 million discount-minded customers. The store otherwise accepts only cash or debit cards.
Under the exclusive deal, Costco also heavily marketed its own branded American Express cards to its members, though they were free to use other AmEx cards. Analysts said the relationship has been a boon to both, particularly the New York credit card company.
AmEx said Thursday that the relationship would end in March 2016 when its current 10-year contract with Costco expires.
Meanwhile, Nelson said, “It’s business as usual with American Express for the next 13 months.”
Nelson said the warehouse chain intends to make the transition as easy as possible for customers. Members might have to sign up for another credit card, he said, but the new partner might be able to buy AmEx’s portfolio and simply provide customers with new cards.
The AmEx announcement, which shook its shares, is a sign of a shifting balance of power at the checkout counter as giant retailers such as Costco can afford to squeeze ever-lower swipe fees from credit card companies. At the same time, AmEx and its rivals face an increasingly competitive landscape as new payment systems arise.
For American Express, the split with Costco marks another blow as it struggles to meet revenue targets and find new ways to grow.
The Costco partnership represented 8%, or $80 billion, of AmEx’s billed business and about 20%, or about $14 billion, of its interest-bearing credit portfolio, said analyst Richard Shane of JP Morgan Chase & Co.
Still, the company said a renewed deal didn’t make sense given the terms Costco was demanding.
“The bottom line is that the economics weren’t going to work for us,” said Marina H. Norville, an AmEx spokeswoman. “As a company that prides itself on customer service, we needed to deliver something that makes sense. The economics just weren’t there.”
She said Costco was seeking “significantly” lower fees than the average 2.45% it now charges merchants.
For years, American Express had the luxury of being able to charge merchants a premium price — as much as 6% of sales at one point — in exchange for access to well-heeled customers who typically spent more on average than other cardholders and paid off their balances earlier.
American Express customers spend an average of $142.82 per transaction versus $90.44 for MasterCard, $84.67 for Visa and $63.91 for Discover Financial Services, according to Jim Sinegal, a senior analyst for Morningstar Inc.
For AmEx, the strategy had the double benefit of generating high fee income while keeping credit risk down. Even today, about 80% of the company’s revenue comes from swiping the cards and only 20% from interest income on pending balances, Sinegal said.
AmEx also was an early mover in the rewards business, offering exclusive perks with airlines and hotels, and in the partnership business, such as with Costco.
The partnership had allowed AmEx to expand its distribution to Costco’s relatively affluent members, and Costco got access to AmEx’s high spenders. And the retailer’s heft gave it the ability to demand lower swipe fees than smaller merchants paid to AmEx.
Lately, though, JPMorgan, Citigroup Inc. and an array of rivals have made inroads into AmEx’s core upscale market with their own versions of premium deals for consumers and merchants — and they began offering more generous rewards programs.
Meanwhile, AmEx’s partnership business has been under pressure.
While it recently renewed co-branding deals with Delta Air Lines Inc. and Starwood Hotels & Resorts Worldwide Inc., it lost relationships with American Airlines Group Inc. and United Airlines Inc.'s Continental unit.
In the last few years, AmEx has tried to move down market without eroding the cachet that won its upscale dominance in the first place. AmEx now offers American Express Serve, a prepaid debit card sold through 30,000 locations including CVS Stores Inc., Wal-Mart Stores Inc. and 7-Eleven. It also offers Bluebird, sold exclusively through Wal-Mart.
“They kind of achieved full market share in their target demographic,” said John Hecht, an analyst with Jefferies. “So to keep growing, they had to branch out.”
So far, the jury is out on the new strategy, and the company said it intends to reinvest some of the proceeds from the remainder of the Costco partnership in new product lines, which it hasn’t announced.
AmEx shares dropped $2.40, or nearly 3%, on Friday to $78.08 and have fallen 8% for the week.
For Costco, the breakup is a much smaller affair, though it left shoppers with mixed views.
Young, the jeans-buying customer at the San Juan Capistrano store, was annoyed at the prospect of changing his checkout routine.
“It’s going to be a royal hassle for people like me to switch cards,” he said. “So for us, it may be just a reason to switch back to cash.”
But Richard Jordan, an evangelical minister from Bloomington, Ill., visiting San Juan Capistrano for a business conference, said he would be happy with any new Costco credit card partner — as long as it gives the same rewards he now gets from AmEx.
Starkman reported from New York, Reckard from Los Angeles.
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