Did American Express Drop the Ball With Costco?

Photo of author

By Jacob Maslow

costco gas stationWell, that didn’t take long. A few weeks after Costco (NASDAQ:COST) announced that it is dropping American Express (NYSE:AXP) as its exclusive credit card provider, Costco, the giant warehouse shopping company, announced a replacement deal with Citigroup (NYSE:C) and Visa (NYSE:V). The speed of this deal shouldn’t be a surprise. After all, Costco is a massive deal. Whichever credit card network lands this retailer is sure to make tons of money. The big question is whether or not American Express screwed up by letting its relationship with Costco go.

According to American Express, it didn’t make financial sense to continue its deal with Costco. It previously had a co-branded credit card and payment processing deal with Costco. Considering all the other problems American Express is currently having and the fact that it is transitioning, it would make sense that it would at least try to hold on to its Costco deal. It is not like its Costco partnership wasn’t adding much to American Express’ bottom line. In fact, a large chunk of American Express’ total sales volume was through the partnership. It kind of makes company observers scratch their heads as to why American Express would drop the ball with Costco.

You only need to look at the fact that Costco has more than doubled its yearly revenues. It is now clocking in at $112.6 billion every fiscal year, and its annual profits come in at over $2 billion. Given such volume, American Express lost a very powerful and profitable partner. It remains to be seen whether or not American Express’ stock and overall business viability will survive. Maybe it was getting a raw deal from the Costco deal. However, it all boils down to timing. Maybe a little bit of revenue rather than no revenue at all, especially during trying economic times, would have been the better approach.

Images Courtesy of DepositPhotos