By Robin Sidel
American Express Co. said its 16-year-old exclusive relationship
with warehouse club Costco Wholesale Corp. will end next year,
dealing a blow to the card company that has already been falling
short of its revenue goals.
The loss was unusually significant for the New York company, as
Costco cards account for one out of every 10 AmEx cards in
circulation and 20% of the company's loan portfolio. The move led
Chief Executive Ken Chenault to hold a conference call with
analysts to discuss the expected negative impact to the company's
earnings for the coming two years, as well as its plans to
counteract the loss.
AmEx, which issues credit and charge cards and owns a processing
network, said it had been unable to reach a new agreement with
Costco on terms that "would have made economic sense" for the
company.
"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.
The news battered AmEx shares, which fell 6% to $80.82 in
afternoon trading.
Co-branded Costco cards represent 8% of AmEx customers'
world-wide spending, said Jeffrey Campbell, AmEx's chief financial
officer. Another 1% of spending comes from other types of AmEx
cards that are used at Costco, he said.
Costco had $110 billion in sales in its fiscal year that ended
in August.
Costco is one of the few big U.S. merchants that only accepts
AmEx cards. Credit cards branded by Visa Inc., MasterCard Inc. and
Discover Financial Services can't be used at Costco warehouse
stores. Costco, however, does accept debit cards from Visa and
MasterCard.
AmEx said the pact 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.
Customers who have other AmEx cards also won't be able to use
them at Costco, which is expected to soon reach a new deal with
another card company.
A spokesman for Costco declined to comment on its plans to
replace the AmEx arrangement.
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 Chase
& Co. 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 and getting more small businesses to accept
its cards. The strategy will likely take years to pay off.
Costco has long been one of AmEx's biggest partners. AmEx also
has a big exclusive arrangement 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.
AmEx's partnership with JetBlue Airways Corp. is also expected
to end soon, but that is a far smaller relationship than Costco or
Delta, according to a person familiar with the arrangements.
Mr. Chenault said the Costco pact's end would have a negative
impact on revenue and earnings per share in 2015 and 2016. "We
believe we have a number of different ways to drive growth going
forward," he said, referring to the company's recent expansion into
prepaid debit cards and other strategies.
AmEx will pursue efforts to convince the holders of the Costco
branded cards to use other AmEx products. 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.
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.
"We will invest in other opportunities that we think can
generate greater returns over time," he said in the conference
call.
Meanwhile, earnings per share are now expected to be "flat to
modestly down" in 2015 compared with 2014 and then return to growth
in 2016, Mr. Campbell said.
The dissolution of the partnership comes just a few months after
AmEx and Costco ended their similar arrangement in Canada. Costco
now has a partnership in Canada with MasterCard and Capital One
Financial Corp.
Mr. Chenault said the end of the Costco deal could help raise
AmEx's so-called 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 it was eliminating 4,000 jobs. The
move came as part of an effort to control expenses amid a shortfall
in revenue targets.
AmEx is awaiting a judge's verdict in a federal antitrust case
that took place last summer. The Justice Department sued AmEx over
its merchant rules, contending that they inhibit competition.
AmEx has said its policies aren't anticompetitive. It has also
said it could suffer a "material adverse effect on our business" if
it loses the case.
Write to Robin Sidel at robin.sidel@wsj.com
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