By Robin Sidel
Citigroup Inc. and Visa Inc. won the sought-after credit-card
contract for Costco Wholesale Corp., in a move that will
significantly expand the kind of plastic that is accepted at the
warehouse giant.
The pact reflects the financial industry's hunger for loyal and
creditworthy customers, but it isn't clear whether Citigroup and
Visa are getting a bargain worthy of the shopping club.
Customers, however, will get to use their Visa credit cards
while shopping for everything from bulk-rate bathroom supplies to
big-screen televisions, after 16 years of being restricted to cards
issued by American Express Co., which previously had an exclusive
relationship with Costco.
Starting April 1, 2016, Visa will be the only brand accepted at
Costco. In addition, Costco will partner with Citi to issue a new
co-branded card to replace an existing AmEx-Costco card.
The agreement means credit cards branded by MasterCard Inc. or
Discover Financial Services still won't be accepted in Costco
stores. Costco stores will continue to accept Visa and MasterCard
debit cards.
Financial details weren't disclosed, but several people involved
with the discussion said that Costco was driving a hard bargain
with more favorable terms than it had in the AmEx deal. Costco also
may have had the upper hand in negotiations because big retail-card
portfolios aren't put up for bid very often, card analysts
said.
The partnership highlights Costco's increasing clout as the
second-largest retailer in the U.S. behind Wal-Mart Stores Inc. The
company, which started in 1983 in Seattle, now has 671 locations
around the world and a customer base that is loyal and affluent:
Costco customer households in the U.S. had an average income of
$91,862 in January, compared with an average U.S. household income
of $68,664, the firm said. More than 90% of its customers renewed
last year.
As a result, the Costco business was subject to fierce
competition, including months of negotiations that pitted Visa
against MasterCard and Citi against the card unit of J.P. Morgan
Chase & Co., people familiar with the discussions said.
Costco's tough stance in the talks was highlighted last month
when AmEx said it had been unable to reach a new agreement with
Costco on terms that "would have made economic sense" for the
company.
The deal is fairly unusual for Visa, which rarely gets the
chance to be the only card brand a merchant accepts. In part
because of Costco's brand loyalty, the deal "represents a solid win
for Visa," wrote J.P. Morgan payments analyst Tien-tsin Huang in a
note to clients. He said his view depended on the terms including
"reasonable economics."
Citi is already a large issuer of plastic that builds loyalty
among specific shoppers, providing cards for the likes of hotel
chain Hilton Worldwide Holdings Inc. and Home Depot Inc.
"We believe that we're positioned well to partner with Costco
and take advantage of their loyal customer base," said John
Gerspach, Citi's chief financial officer, at a financial-services
conference on Monday.
Although AmEx shares were pummeled when the company announced
the partnership would end, the latest news had less impact on the
new partners because their fortunes will be less tied to Costco.
Citi gained 2% to $53.49, while Visa climbed 2.6% to $278.29.
The deal comes as credit-card companies are trying to grow, even
as consumers remain skittish about spending. Visa is the largest
payments network, ringing up more than $1.2 trillion in credit-card
purchases each year. Visa also has 281.4 million credit cards in
circulation, compared with 54.9 million cards for AmEx, the
companies say.
Still, Citi's challenge will be to persuade Costco customers to
use its new co-branded credit card instead of any other Visa card
that may be in their wallets, analysts said. To do so, it will need
to provide juicy rewards and other perks to persuade Costco
customers like Beth Baker to use the new co-branded card.
Ms. Baker, who now uses a debit card because she doesn't have an
AmEx card, said she would likely switch to her current Visa card
that is issued by Capital One Financial Corp. so that she can get
more rewards points on her existing account.
"I don't want another credit card," said the stay-at-home mom,
38 years old, who lives in Raleigh, N.C., and spends $150 to $200
on each Costco shopping trip every couple of weeks.
Costco didn't provide many details of the new Citi card, saying
only that it "would provide generous rewards to Costco
members."
Costco said it would provide more details about the cards in
coming months. In a twist, Citi's card business is run by Jud
Linville, a former top AmEx executive. The deal comes less than two
weeks after AmEx announced its 16-year relationship with Costco
would end next year. In that arrangement, AmEx was the only credit
card accepted at Costco stores, and the two companies also issued a
co-branded card that could also be used anywhere AmEx is accepted.
For AmEx, Costco represented one of every 10 of its cards in
circulation and 8% of its spending.
Christina Rexrode contributed to this article.
Write to Robin Sidel at robin.sidel@wsj.com and Angela Chen at
angela.chen@dowjones.com
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