Costco and American Express terminate a 16 year old business partnership

Costco, a wholesale retail giant and American Express, a financial services corporation, recently announced that they would be ending their contract. According to the terms of their agreement, American Express was the sole credit card accepted at Costco. Additionally, American Express and Costco had issued a co-branded TrueEarnings credit card, which could also be used at other stores. After March 31, 2016, customers will no longer be able to use American Express credit cards in Costco. The TrueEarnings credit card will also be discontinued [1]. From a marketing perspective, this could have several consequences for both firms.

What are the implications for each company's brand with this decision?

American Express’s brand image has been adversely affected with the termination of its contract with Costco. There are several factors that contribute to the same.

• Low confidence of Costco in American Express’s brand: The termination of the contract, albeit from a financial perspective, implies that the exclusivity that American Express had commanded has ceased to exist. Costco clearly sees no benefit in being associated with American Express’s brand, which may result in declining confidence among American Express customers, particularly those associated with the TrueEarnings card.

• Declining status symbol: An erstwhile force in the credit card industry, American Express currently faces stiff competition from companies like J.P. Morgan Chase and Co. and Citigroup Inc. who have made inroads into its core upscale market with their own versions of premium deals for consumers and merchants [2].

• Recent termination of agreements with other companies: American Express has recently ended its contracts with Costco Canada, JetBlue Airways and United Airlines Inc., making it less appealing as a potential collaborator [2], [3].

• Loss of credibility on Wall Street: Financial analysis firms, like FBR Capital, RBC Capital Markets, Barclays and Argus have all reduced price targets on American Express [4]. Shares declined 6.4% after the announcement of the termination, wiping $5.6 billion off its market value [5]. Lack of confidence from financial experts further damages its brand image.

Costco’s brand image is not likely to be particularly affected. There could be minor irritations at the inconvenience of having to switch credit card companies. These can be managed by ensuring and advertising the ease of transferring over to its new partner(s). A portion of its middle to high end consumer base, mostly in suburban areas, might be unhappy with the prospect of potentially switching to a less exclusive credit card company [7]. It is essential to focus on advertising the new, positive and improved services. Costco holds 50 percent of the market share in the wholesale warehouse club industry [6], signifying that it retains its customers’ loyalty. Additionally, its stock has been unaffected in the wake of the announcement, a clear indication that its position remains strong [8]. It is unlikely to face major customer deflections as Costco patrons use the TrueEarnings card primarily because they want to shop at Costco and not due to loyalty towards American Express. If it switches to a more reasonably priced credit card company, it might widen in its customer base. These would be people who could not afford or qualify for the exclusive American Express cards.
Does either company win or lose, or do they both win or lose with this decision?

This decision is a blow for American Express for the following reasons:

• Future challenges: maintaining customer loyalty and potential competition from Costco’s new partner: Upon the discontinuation of the TrueEarnings card, there is no guarantee that the customers will stay with American Express and not switch to the Costco’s future credit card partner(s). It is likely to face fierce competition for TrueEarning card holders’ loyalties from the same.

• Potential financial losses due to heavy dependence on TrueEarnings card: 10 percent of American Express cards are Costco-branded. The TrueEarnings card accounts for 8 percent of its billed business and for 20 percent of its loans [10]. Costco brought in $113 billion in revenue in 2014 and American Express was the only credit card issuer [9]. Moreover, 70% of the spending on this card has been in places other than Costco [1]. This signifies that a large portion of their profits are a result of the partnership with Costco and that they face certain financial problems in the near future.

• Threat to future partnerships as a result of recent financial troubles and a lowered brand image: American Express has recently been falling short of sales targets [1]. Its recent quarterly results already showed a rapid rise in expenses and the need to cut jobs in order to control costs [4]. Potential financial difficulties, coupled with its lowered brand image might hinder new partnerships.

• Increased competition enforcing competitive pricing: American Express has always been marketed as an exclusive company and charges merchants higher fees to accept their cards [9]. However, market forces have changed and in the presence of a variety of alternatives, American Express might be forced to lower its merchant fees. In order to offset the loss, they might have to limit rewards and benefits to cardholders, which would decrease customer loyalty and brand image.

This is a win situation for Costco. The reasons for this are the following:

• Evidence of clout in the industry: The exclusive nature of the contract, by which Costco accepts only one credit card, is financially appealing for credit card companies. It potentially makes the contract more attractive to bidders. This decision will definitely set up a race among credit card firms to enter into a contract with Costco [1].

• Financial profits due to decrease in transaction fees: The race to have a monopoly over Costco’s credit card transactions could possibly result in Costco receiving financially appealing offers. It might gain handsomely from lower transaction fees.

• Increase in customer size: If Costco shifts to an easier to obtain, more prevalent credit card company, it could further increase its customer base.

Conclusion

American Express and Costco have decided to terminate their business contract whereby American Express was the sole credit card accepted at Costco. This paper describes the effect on each company’s brand image and explains why it is a losing situation for American Express and a winning one for Costco.
References

[1] "AmEx-Costco Divorce Shakes Up Card Industry." WSJ. Web. 23 Feb. 2015. .

[2] Los Angeles Times. Los Angeles Times. Web. 23 Feb. 2015. .

[3] "American Express to End Contract with Costco, Shares Fall." Zacks Investment Research. Web. 23 Feb. 2015. .

[4] Williams, Sean. "First Costco and Then Wall Street Declined American Express Company." Web. 23 Feb. 2015. .

[5] "How American Express's Costco Loss Makes Discover Look Better." MarketWatch. Web. 23 Feb. 2015. .

[6] Volkman, Eric. "AmEx and Costco: What's Behind Their Split?" Web. 23 Feb. 2015. .

[7] Web. 23 Feb. 2015. .

[8] "Costco Wholesale Corporation." Yahoo! Finance. Web. 23 Feb. 2015. .

[9] "Amex Shares Sink On End Of Costco Exclusivity." Forbes. Forbes Magazine. Web. 23 Feb. 2015. .

[10] "Amex and Costco to End Exclusive Relationship, Date Others." The Points Guy. Web. 23 Feb. 2015. .