Costco Wholesale (NASDAQ:COST) will end its 16-year co-brand and merchant acceptance agreements with American Express (NYSE:AXP) next year.
American Express is the only credit card Costco accepts—it also takes debit cards—and as of yesterday, American Express representatives were in stores trying to sign customers up for the card. American Express stock dropped by about 6 percent late yesterday on the news.
The agreements will end March 31, 2016, according to an American Express press release. Costco cards represent about 10 percent of the AmEx cards now in circulation, and 20 percent of the company's loan portfolio, the Wall Street Journal reported.
A Costco executive declined to say what other credit card will replace AmEx, but in Canada, where Costco ended its relationship with AmEx last month, customers can now use a co-branded Capital One Platinum MasterCard, as well as other MasterCards, according to the Financial Post. The AmEx and Capital One cards also serve as membership cards at the warehouse stores. Sam's Club dropped Discover co-branded cards last year and replaced them with GE Capital Retail Bank MasterCards for both Sam's and Walmart.
"We are proud of the value created over many years for Costco, for our card members and for our shareholders," Kenneth Chenault, chairman and CEO of American Express, said in a prepared statement. "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. Instead, we will focus on opportunities in other parts of our business where we see significant potential for growth and attractive returns over the moderate to long term."
The loss of Costco would reduce spending on AmEx cards by about $80 billion a year, including their use at businesses other than Costco's 468 stores in the United States and Puerto Rico, Tien-tsin Huang, a JPMorgan securities analyst, told Reuters.
In an earnings call yesterday morning, AmEx said losing the Costco contract would be a drag on its earnings and revenue, both this year and in 2016, Fortune reported. AmEx said it expects earnings to be flat this year following projections by analysts that earnings would grow 10 percent, based on polling by Thomson Reuters. AmEx expects earnings growth to return next year.
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