Costco is a company that has always enjoyed a very loyal customer base. Many of the folks who love shopping for bulk items at this well known retailer have always done so with their American Express cards. However, with American Express ending its deal with Costco, those customers may have to switch over to a new card when they head to the buy-in-bulk retailer.
The shares for American Express fell 6.4 percent when they announced that the deal will soon be coming to an end. The statement that American Express made said that their current co-branding agreement with Costco will expire in March of 2016.
The CEO of American Express, Kenneth Chenault was quoted in an official press release, saying, “Taking a very disciplined approach, we began discussions on a possible renewal with Costco well in advance of the contract expiration. However, we were unable to reach terms that would have made economic sense for our Company and shareholders.”
Costco has 671 warehouse stores around the world. 474 of those stores are located in the United States and Puerto Rico. During the quarter that closed February 1st, Costco managed to grow their sales by 3 percent, with an amazing $49 billion in sales.
With all of those dollars at stake, then, why would American Express stand idly by while the current agreement comes to an end? In a recent call with their investors, the executives from American Express explained why the agreement was not being renewed.
The company’s CEO said that American Express started to have early discussions on renewing contracts with the companies who put their brands on credit cards. The contracts usually include rewards programs, and good publicity for both the retailer and the credit card companies. Cathay Pacifica and Delta were two of the companies that did wind up renewing their contracts.
According to Chenault, however, the deal with Costco did not make any economic sense. Even the deal that American Express struck with Delta proved to be less of a money maker than they had expected. It is noteworthy, that the company also let its agreement with Costco in Canada come to an end last year.
Like other big companies that earn money overseas, American Express is starting to experience a bit of pressure because of the foreign currency implications of a stronger U.S. dollar. The company announced that they were laying off 4,000 employees recently, s part of a company restructuring plan.
American Express Chief Financial Officer Jeffrey Campbell cut right to the chase on the call, saying, “We could begin to see a modest slowdown in billings, loans and revenue growth associated with the Costco U.S. co-brand over the course of 2015, and we would expect this slowdown to increase as we near the end of the contract.”
As of right now, though, American Express has forecasted earnings per share growth by the time 2016 rolls around according to the company CEO. The fourth quarter profits increased by 11 percent to 1.45 billion dollars, which equates to $1.39 per share. The expected rates were expected to be very close to this figure, at $1.38 per share.
For their part, though, Costco does not seem to be hurt by this situation. The company is replacing the deal with a new agreement with Visa/Citi. The new co-branded cards could become available as soon as April of 2016.