American Express’s Efforts At Mitigating Costco Loss Impact Could Cost It 28 Cents In Earnings
American Express (NYSE: AXP) lost its co-branding deal with Costco to Citigroup earlier this year. The new Costco card will be issued by Citigroup instead of American Express and use Visa’s card network instead of that ofAmerican Express. This loss is a big blow for the company as close to 8% of the total spending on American Express’ card network was attributable to the Costco relationship. However, the company seems confident that it will be able to mitigate the impact of losing this relationship through a combination of cost cutting and attempts to retain members of Costco cards on the American Express network.
According to the company, it can retain “at least 20% of the out of store spending of the former Costco co-brand card members”. It plans to do so by offering new American Express cards to these members. This raises the obvious question of whether these members will feel any reason to use these cards. One way American Express can do this is by increasing the rewards and promotions for the use of these newly issued cards. In fact, this is exactly what AmEx is doing with rewards worth $250 for every $1,000 of spend on offer for the first three months to the erstwhile Costco co-brand card members. But after that, it will be difficult for American Express to convince these users to keep using its cards as it will have to compete directly with Visa, which offers lower processing and transaction fees to use its network.
American Express management has stated multiple times that it plans to increase spending to drive customer acquisition. It expects to raise its marketing and promotion expenses by around $200 million, compared to 2015 spending of $ 3.1 billion. In the first half of 2016, the company spend $ 1,515 million on marketing and promotion, implying that in the second half of the year, spend would increase by $ 270 million. This would cost the company around $ 0.28 in earnings per share for the second half of the year, assuming all other figures remain constant from the first half of the year.
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