American Express striving for growth (AXP, COST)

Amex striving for growth

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In its Q1 2016 earnings report and presentation, American Express discussed plans to continue to bolster its billed business and card acquisitions through the rest of the year.

Amex’s billed business is growing, but it’s already beginning to feel the impact of the impending Costco sale. That’s causing it to begin to fight to retain Costco customers.

• Amex’s billed business grew 6% on a constant currency basis year-over-year (YoY) in Q1 2016. Customer card spend rose to nearly $236 billion, marking both a YoY and sequential increase.
• But the impending changes to its Costco portfolio are already causing strife. For context, Amex’s co-brand partnership with Costco is coming to an end this summer. That will cause a big dip in Amex’s billed business in the second half of the year, because Costco cards represented 8% of Amex’s billed business and comprised 17% of the firm’s US cardholders in 2015. But it seems like the dip is already beginning — card spend among Costco cardholders, specifically, decreased 16% YoY in Q1, which dropped the firm’s overall billed business growth significantly during the quarter.

As a result, Amex is beginning to double down on customer acquisition and converting Costco customers to other Amex products. Amex added 2.1 million new cardholders in the US during Q1 2016. And in its earnings call, the firm noted that current Costco card members acquiring other Amex products was a “significant driver” of that increase in acquisitions, though the firm neglected to provide a specific number.

But converting Costco cardholders to other Amex products could be challenging for several reasons:

• Short timeline: Once the portfolio is fully sold, Costco customers will “no longer be known” to Amex, according to Jeffrey Campbell, Amex CFO and EVP, which gives Amex a short marketing lead time to capture these consumers.
• Challenging environment: When Amex ended its partnership with Costco in Canada in 2015, the firm retained about 50% of its out-of-store spend. But Amex believes that number will be significantly lower in the US due to marketing restrictions.
• Strong rewards competition: Citi’s Costco card, which will replace the Amex card, offers higher rewards in key segments like cash back and restaurant spending. And it’s being offered automatically to all existing Costco cardholders. Though Amex thinks that Citi’s offering and its value proposition appeals to a different segment of the market than many of its cards, it’s likely that Citi’s strong Amex replacement could hinder Amex conversion.

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