Bloomberg: Costco to pay near zero in new credit card deal
Friends, this is, from my humble personal perspective. exactly why AMEX did the right thing in exiting the deal with Costco. Had they accepted the same terms they would still be the exclusive card and we would have never know any different. Then the next few operating reports would come out and we shareholders would be appalled at the decision to accept zero transaction fee in exchange for top line churn and some loan balances.
That is not the AMEX business model.
Today I feel stronger than ever that the company made the prudent decision to pass on the proposed deal.
I understand the points you are making and respect your perspective and opinion. particularly appreciate your concerns about AMEX reaching your age group, especially high achievers like yourself. (Obviously I'm being presumptuous tagging you as a high achiever, but feel safe doing so)
As you point out, the company had better be vigilant in their analysis of demographics and trends within those demographics. expendable income etc.
On the Costco deal specifically, it is my opinion that AMEX choosing to not accept Costco's terms for a renewal of the deal does not, by any means, indicate a "failure to be competitive". not at all.
My professional life has placed me in the middle of these types of high level negotiations countless times. if experience has taught anything, it would be this.
If you have the capital to take a calculated risk into a new space (AMEX as an exclusive provider within a retailer) then by all means, take the risk and see if incremental expansion can occur.
The biggest mistakes made
in this scenario is the critical next phase. evaluating the results of the initiative.
I'm certain that the calculation made by AMEX was that after the initial phase, there would be opportunity to enhance margins incrementally over time. That did not happen. Costco held firm, and V,M were willing to accept a near zero fee structure in exchange for exposure to the Costco consumer.
That may very well work out fine for V and M, but (in my opinion) that is not a wise position for a higher end provider like AMEX. I am very pleased that they passed on that opportunity.
This plays out in the soft drink world regularly. and is quite similar.
Large venues (Stadiums, Leauges etc.) offer exclusive pouring rights, advertising, and exposure to a large group of fans in exchange for large amounts of money. Both major soft drink providers are always interested that exposure, but there is limit to the price those providers are willing to pay.
When the cost/benefit relationship becomes disproportionately out of whack, good stewardship requires you to walk away. Fans scream "How could you walk away from that? How could you not be competitive?" Truth is, it is not a failure to compete, it is sober, deliberate analysis of the proposition that compels responsible leaders to walk sometimes.
Granted I have limited line of sight to the details here, but from what I can see, the company made the right call. the market is providing an extreme over reaction, and subsequently offering a discounted opportunity to long term investors.
Wish you all the best my friend..
17 Apr, 06:22 PM Reply LikeSource: m.seekingalpha.com