AmEx Steps on the Marketing Gas Pedal To Help Fill Costco Void

Fourth-quarter profits and U.S. charge volume declined while marketing expenses increased for American Express Co. as the company continued to dig its way out of the hole left last year by the termination of its U.S. cobranding and acceptance pact with Costco Wholesale Corp.

New York City-based AmEx reported Thursday that it spent $1.21 billion on marketing and promotions in the quarter, up 35% from $892 million a year earlier. And for all of 2016, AmEx spent $3.65 billion on marketing and promotion a 17% increase from 2015’s $3.11 billion.

The marketing dollars are going for everything from AmEx’s upscale Platinum card, which faces new competition from bank-issued Visa and Mastercard premium cards, to digital card marketing and merchant promotions. The merchant marketing included promotions such as OptBlue and Small Business Saturday during the holiday shopping season to increase AmEx’s appeal to small merchants, Jeffrey C. Campbell, AmEx’s executive vice president and chief financial officer, said on a conference call with analysts.

“We leveraged our many years of sponsoring Small Business Saturday in the U.S. to build upon the success that we’ve had increasing our small-merchant coverage in the U.S. through OptBlue,” Campbell said, according to a Thomson Reuters StreetEvents transcript. “Our fourth-quarter promotional campaign helped make card members aware of the many new locations where American Express is now welcomed.”

The cobranded and membership card for Costco, the world’s second-largest retailer by revenue, according to the National Retail Federation, had accounted for 8% of AmEx’s worldwide card-billed business in 2014. But last summer Costco brought in Citigroup Inc. to issue a Visa cobranded card and also made Visa the only credit card brand it would accept in its U.S. stores. Partly as a result of that loss, AmEx’s fourth-quarter U.S. card-billed business declined 8% to $174.4 billion. For all of 2016, AmEx’s U.S. volume slipped 3% to $700.4 billion, but international volume rose 6%, lifting AmEx’s global card-billed business to $1.04 trillion, down less than 1% from 2015.

AmEx had given Costco a favorable discount rate, so the loss of the Costco program has actually helped to boost some of AmEx’s financial metrics. Fourth-quarter total discount revenue from purchase transactions declined by 4%—only half the rate of the decline in U.S. billed businesses—to $4.7 billion. For the year, discount revenue was down 3% to $18.7 billion. AmEx’s worldwide discount rate actually increased in the fourth quarter to 2.44% from 2.42% a year earlier.

“Lower discount-rate volume coming off the network more than offset the rate pressure from merchant negotiations, including those tied to new regulations in Europe, changes in industry and regional mix, and the continued growth of OptBlue,” Campbell said. Small businesses tend to be less price sensitive than big merchants.

AmEx posted fourth-quarter net income of $825 million, down 8% from $899 million a year earlier, on revenues of $8.02 billion net of interest expense, a 4% decrease from the year earlier period’s $8.39 billion and off 3% when adjusted for currency fluctuations. For the year, AmEx posted net income of $5.41 billion, up 5% from $5.16 billion in 2015, on revenues net of interest expense of $32.1 billion, down 2% from $32.8 billion and off 1% when adjusted for currency changes.