Can Costco Attract Customers With Its New Partnership With Visa?

-11.00%
Downside
734
Market
653
Trefis
COST: Costco logo
COST
Costco

Last year, Costco (NYSE:COST) announced that it was ending its 16 year old partnership with American Express and was tying up with Citigroup and Visa to replace American Express with Visa cards in its stores. While this switch was been delayed and did not meet the March 2016 deadline, the company announced that it will now happen effective June 20th,  when Costco will accept only Visa cards apart from cash and checks in its stores. Visa had a nearly 60% market share in 2014 in terms of purchase transactions globally, compared to the 7% figure for American Express. More users prefer Visa over American Express, since the latter has stricter issuing guidelines to ensure that more credit worthy borrowers are part of its network. This often makes the younger population ineligible for an American Express card.  As Costco partners with Visa, it can benefit from the latter’s large network including the younger consumers who might be attracted to Costco post this deal. Also, given Visa’s network and a wide range of Visa reward cards, users should be able to maximize their rewards while shopping at Costco, giving them additional incentives to increase their transaction volumes at the store.

Visa’s Wider Network Increases Possibilities Of Rewards

Several banks offer different Visa reward Reward cards, so Costco’s partnership with Visa opens up several opportunities for consumers to maximize their rewards while purchasing from its store. For instance, small businesses that purchase in bulk from Costco can get 2% cash back on all purchases on Capital One’s Spark Cash Visa Card. This would be in addition to the cash back users get by being executive members of Costco.  The company will allow users to use their non-Citi Visa cards at Costco, thus giving them the flexibility to choose the right Visa rewards card. Furthermore, millennials (consumers aged 18-34) who generally do not prefer American Express due to its tight requirements, would now be attracted to Costco with the Visa payment option.  While the mode of payment is not a driving factor to attract customers to Costco warehouses, the convenience of using an existing Visa card which can maximize rewards can attract erstwhile reluctant customers to its stores. The company has a membership renewal rate of nearly 90%, indicating the loyalty of its customers.  So if it is able to attract more consumers due to a convenient payment option, it can increase its membership base rapidly.  As per our estimates, total Costco membership card holders are likely to increase from nearly 86 million in 2016 to 105 million by the end of our forecast period.

Relevant Articles
  1. Does Costco Stock Have More Room For Gains After Rising 40% in 2023?
  2. What To Expect From Costco’s Stock Post Q4 Results?
  3. Costco’s Stock Up 23% So Far, What’s Next?
  4. What To Watch For In Costco’s Stock Post Q3?
  5. What’s Next for Costco Stock?
  6. Company Of The Day: Costco

A faster pace of increase in this metric can impact Costco’s valuation positively.

 

We believe Costco’s partnership with Visa will work to its advantage in the long run. It will attract the younger generation of consumers and has the potential of increasing the average spend in its stores given the attractive and flexible reward systems of various Visa reward cards.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid CapMore Trefis Research