Discount shopping

13 February 2015 By Rob Cox, Stephanie Rogan

True to form, Costco customers may come out ahead in a valuable commercial arrangement. That’s at least one way to read the market tea leaves from this week’s divorce between the U.S. warehouse retailer and American Express, its longtime exclusive payments partner. The news swiped some $8 billion from the card issuer’s value. Only part of that has accrued to rivals MasterCard and Visa. The shortfall reflects the benefits to millions of discount shoppers.

Amex boss Kenneth Chenault shocked the market on Thursday by saying he was unable to reach an agreement “that would have made economic sense for our company and shareholders,” and would cease its 16-year partnership with Costco at the end of next March. It’s a big deal considering that Costco accounts for about one of every 10 Amex cards in circulation, a fifth of its loan portfolio and 8 percent of Amex customer spending worldwide.

While the precise terms are not fully disclosed, investors decided they were worth as much as $8.2 billion in market capitalization. Using Amex’s price-to-earnings ratio of about 14 as a proxy suggests the partnership brought in something on the order of $500 million to $600 million of net income annually, or about 8 percent of its bottom line.

Not surprisingly, the two Amex rivals best placed to nab the business saw their market values blossom. Over the past two days, MasterCard is up almost $3 billion and Visa about $2.5 billion. What’s peculiar, however, is how Costco’s value nudged up less than $200 million, to just under $65 billion. So there’s still a couple of billion dollars of market value unaccounted for.

That’s a numerical reflection of the Costco model. The company is always seeking cost-cutting opportunities from suppliers, whether it is Procter & Gamble, an Argentine producer of Malbec or even the provider of payment services. The bulk of those savings are passed along to customers, who then loyally renew their club subscriptions, which account for the majority of the company’s profit. The gap between the Amex decline and the equity increases elsewhere implies savings worth around $2 billion.

The market may not have totally understood the dynamics of the relationship, of course. That will only be clear when the end result of negotiations to find a suitable replacement is disclosed. Until then, it looks like Costco shoppers owe a debt of gratitude to Amex shareholders.


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