Costco Wholesale Corporation (COST, Financial), a warehouse club has decided to stop accepting AmEx cards from April 2016. This has come as a huge shock to investors after the sixteen-year old partnership between Costco Wholesale Co and American Express Company (AXP, Financial). It is being stated that the two companies have failed to reach terms on the renewal of the contract between them. American Express, the financial company that issues credit as well as charge cards said that this move “would have made economic sense” for the company and, therefore, its happy to have arrived at such a decision.
Costco Wholesale Corporation which sells a wide assortment and range of merchandise currently has a market capitalization value of around $64.8 billion. It’s often referred as the second largest retailer in the U.S. according to statistics related to the past year. In fact, in the past deacde, Costco has worked towards doubling its revenue to around $112.6 billion by the fiscal year 2014 which ended last August. The bottom line of the company has also improved phenomenally to reach a whooping $2.06 billion.
Now, with the agreement not being renewed, let’s find out how such a non-renewal could affect the two companies in the long run and what the management is saying on such a decision.
The future is bleak for both companies
News of the divorce between Costco and AmEx has indeed shaken up the card industry. It may not be a well known fact, but Costco Cards actually account for one in ten of AmEx's card circulation. Hence, one can assume that the current agreement will affect AmEx's business in the near future.
Right now customers cannot purchase merchandise with any other card like Visa Inc (VISA34, Financial) or MasterCard Inc (MA, Financial), except for American Express credit card from Costco. Also the Costco-AmEx card offers cash-backs, as well as 0% interest for new cardholders, which are promotional factors behind Costco’s rapid growth momentum. There is no annual fee levied as well on holding such a card, and regular customers have to pay a variable rate of 15.24% six months after the card has been issued.
Now when the divorce finally gets through in April 2016, customers will be forced to issue a different card while shopping at the store. AmEx was anyways on the brink and was suffering from shortage of sales. This naturally comes as a huge blow to the earnings of the American multinational financial services company.
It is not to be ruled out that Costco would also feel the heat after the end of the agreement as changing to a different card setup might not a preferred option for its regular customers. This may result in consumers turning elsewhere for business.
The top management stays firm on the action plan
Ken Chenault, the Chief Executive at American Express, did agree that this candid move would eat into the company's profits for the next two years. Ken also said it wasn't easy to see the long-term partnership end, but also commented that as the numbers didn't add up quite well,splitting was the only sensible option available at the juncture. AmEx’s stock price plummeted after the news hit the card industry.
In fact, soon after such an announcement, AmEx's shares dropped 6.4%, to $80.48. This marked the company's largest one-day percentage drop since August 2011. Mr. Chenault also said the EPS and revenue of the company will be affected for the coming two fiscal years. However, he remains confident of achieving 12-15% in the “moderate to long term” without the partnership of Costco. He also said this deal could help in raising AmEx’s discount rate-- the price that a merchant pays for every transaction.
Speculations are in the air that Costco might enter into a partnership with Capital One Financial Corporation (COF, Financial) and Mastercard Ă‚ to make them the company's official card partners. Based on such hopes, MasterCard's shares rose by 2.7% while Capital One shares witnessed an increase of 2.6%, soon after this news broke out.
Rounding up
Obviously, financial companies now have an advantage, as Costco is now evaluating plans for a new partner. Financial companies like Citigroup Inc. (C, Financial) and J.P. Morgan Chase & Co (JPM, Financial) are trying to obtain the rights as a partner. Costco may also accept multiple brands like MasterCard and Visa, or may even stick to the one-brand strategy that it currently has implemented. Let's wait and watch the upcoming partnership moves from Costco’s end while it accelerates its pace in closing the long-term rapport with American Express.
