AmEx CEO: Life After Costco

American Express has done some backpedaling during the first quarter of the year.

It’s spent most of Q1 admitting that it was “arrogant” in the past, moving on from severed co-branded agreements, defending its antitrust legal battles and determining how to restructure its business in the digitally-changing ecosystem that led to 4,000 layoffs so far in 2015. But during a time that AmEx needed some good news, its first-quarter earnings delivered.

AmEx posted a better-than-expected Q1 and posted a 6 percent profit increase of $1.5 billion, which was attributed to higher card spending. Overall, card member spending increased 7 percent and card member loans increased 4 percent from a year prior to $66.8 billion. Its U.S. card services has a net income of $934 million and revenue for that segment increased 6 percent to $4.5 billion.

“First-quarter results showed solid core performance and continued progress in expanding the American Express franchise despite an impact from several of the headwinds we’re confronting,” CEO Kenneth Chenault said in the company’s earnings release.

The headwinds that they’re confronting, of course, are how to make up for shortfalls that will impact earnings for much of the next year as a result of the end of the co-branded card deal with Costco announced Feb. 12. Costco was once in a retail class of its own that accepted American Express, but not Visa or MasterCard, but ended that exclusivity and the 16-year-deal. Soon after, it was announced that JetBlue was going a different direction with its co-branded cards, too.

Chenault hasn’t been shy about sharing that the next two years may be tough for AmEx, and the wounds of the Costco breakup still showed during the company’s Q1 with analysts. But much of the conversation was focused on what AmEx plans to do to patch up the revenue shortfalls that will trickle into much of the next year, or two, as a result. In the company’s investor day last month, Chenault acknowledged the challenges ahead. He kept that tone in the company’s earnings report, recognizing there are gaps to be filled. 

“As previously reported, we expect full year 2015 earnings will be flat to modestly down year-over-year with the headwinds we’re facing and as we ramp up investments to help offset the impact from ending our relationship with Costco in the U.S. next year,” he said. “Looking further ahead, we have a range of growth opportunities across the business and continue to be very positive about the moderate to long term outlook for our company.”

Those investments include looking toward other company strengths of AmEx, which includes working with its core small business merchants to boost their loyalty to the brand

“During the quarter, we announced the launch of a new loyalty coalition business in the U.S. This business, named Plenti, leverages the success of similar programs in our international markets that are building business for merchants and delivering rewards to more than 60 million participating customers,” Chenault wrote in the release. “We also moved forward on initiatives that are gaining broader card acceptance among smaller merchants and aimed at capturing a greater share of U.S. consumers’ everyday spending.”

And that everyday spending for AmEx will start with its small businesses. As it looks beyond its larger partnerships that won’t be moving forward with the company, AmEx said they’re dedicated to driving the segment it’s been know for since the start, and that’s the Main Street shops. 

“We do a lots of things to try to help small businesses operate better,” Chenault said in the call with analysts. “When you look at our OPEN [membership], which on the issuing side is about targeting small business, it’s really all about helping small businesses drive the success of those businesses and giving them access to spend capacity that our business model and charge card model is able to fairly uniquely provide them.”

With the Costco relationship ending when 2015 closes, AmEx must prepare itself for days and years ahead without its major partner, but Chenault spoke about life after Costco and the new opportunities ahead. He also indicated that its new customer loyalty coalition may lead to new co-branded initiatives. 

“We’re excited about broadening the reach of the brand, and we’re excited about things like the Everyday Card, and we’re excited about things like Plenti,” he said in a call with analysts. “We are going to launch a Plenti co-brand, which we think will be a very interesting play as one more step of broadening our demographic breach of the brand and the franchise.”

Its new loyalty coalition business is aimed at developing its rewards program to give its small business merchants a boost by motivating its cardholders to spend their dollars with those merchants. While American Express has received criticism for being a bit elitist, Chenault fully recognized that in a speech last month.

“We took our prestige so seriously that as a company, we too became elitist and arrogant,” he said at a speech at Boston College’s Carroll School of Management.

Now, the company is looking to be more approachable by bringing a loyalty program its customers and merchants can relate to. The program is structured similarly to drug-store reward programs insofar as customers can earn points by shopping at one of the seven participating retailers. Merchants teaming up with AmEx include AT&T Inc., Rite Aid Corp., Macy’s, Hulu and Exxon. Once seen as a status symbol for the affluent, AmEx now faces competition from firms like JPMC that are now pursuing wealthy potential card holders.

And now, with card spend on the rise and attention on its new loyalty coalition, it’s clear that AmEx knows the road ahead is going to be a bumpy one, but it’s assured its shareholders and merchants that it’s got the tools in place to fill in the gaps from the Costco fallout.


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