Sunday, February 15, 2015

The collapse of the Costco/American Express relationship

The decision by American Express to break off the Costco relationship has been costly to Amex shareholders.  In the last two trading sessions the stock has lost almost 10% of its value, and is down more than 15% since the beginning of 2015.  It seems fair to say that major shareholders were blindsided.

Looking at the Amex shareholder base, six of its seven largest institutional investors are discretionary holders, not indexers.  This is exceptionally rare for a company of this size.  Seven of its top ten mutual fund holders are also discretionary funds.  Amex gave the appearance of  a steady and ever growing company with a highly visible brand, and the consequential endorsement of Berkshire Hathaway with 14% of shares outstanding and Charlie Munger on their Board.

Now hindsight rules.  Has Amex been innovative enough in recent years.  Have they focused too much on the ultra high end of the card market with their new offerings.  Had they missed opportunities, as indicated by the power of Priceline and Expedia in the travel market.  Several weeks ago an analyst on CNBC said "that market once had been Amex's to lose".  Did Amex just now overplay its hand with Costco, not expecting to be rejected?

Costco's comment was that the decision was all a matter of price, and if so didn't the management, directors, and advisers of Amex see the pain that would be inflicted in the stock market if they didn't concede, or compromise with, Costco's demands, whatever they were.

Here it can only be concluded that Costco no longer wanted the relationship that required Amex card exclusivity, other than debit cards, in their stores.  The continuing downward pressure on the wealth and size of the middle class in this country can't be ignored, and Costco cannot ignore those customers.  They are their core.  We shop at Costco occasionally and there is no exclusivity to their customer base.  How many of those customers would rather use a low to no annual fee credit card, still get a large hot dog with all the toppings and a soda for $1.50 or a whole freshly roasted chicken for $3.99.

Just a quick example...for many people in the lower half of the perceived middle class, their expenses are paid out of earnings on a month to month basis.  They get by adequately but there is little extra. In a month when they need to pay college tuition, take care of larger than expected dental bill, or have reduced income due to illness or an unexpected event, a debit card is of no use as their bank account may be limited. Using their relatively costly Amex card could be done, but why be chained to that?  Not cost but exclusivity was the breaking point of the negotiations is the guess here, and Amex made a big mistake.

Did they never learn that sometimes sharing is necessary?  American Express will remain strong company, but whether the heretofore highly regarded Ken Chenault will remain CEO as this decision is digested is not an unfair question.


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