One of Canada’s biggest retailers is switching credit card providers after negotiations with its current supplier broke down.
Costco Wholesale Corp. says it will stop accepting all American Express Co. cards in its 88 Canadian stores, starting Jan. 1.
The U.S. based warehouse club retailer said it would begin accepting MasterCard instead.
“This is a huge opportunity for MasterCard and Costco to increase membership, offer more value, better benefits and increased savings for cardholders and Costco members,” MasterCard Canada president Betty DeVita said in a statement Thursday afternoon.
More details about the new cards will be available in the coming weeks, the MasterCard statement said.
Costco members that have the current TrueEarnings or American Express Platinum Cash Rebate card will continue to earn cash rebates on those cards until Dec. 31, 2014, Costco Canada said.
Costco said its ending its relationship with American Express after talks to renegotiate its agreement broke down. No further details were provided.
“The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires on Dec. 31,” Lorelle Gilpin, vice president of marketing and membership for Costco Wholesale Canada, said in an email to Canadian customers.
“The terms of the contract were up, AmEx and Costco entered into negotiations and were unable to come to terms,” David Barnes, a spokesman for AmEx in Canada, said in a phone interview with Bloomberg.
AmEx is currently the only credit card Costco accepts in its stores.
The move affects only Costco’s Canadian stores. Its U.S. stores will continue to accept most AmEx cards.
Industry observers said they suspect merchant fees were the sticking point in the negotiations between AmEx and Costco.
A growing number of retailers have been pushing back against their credit card suppliers, saying the processing fees are getting out of control.
Costco’s gross profit margins are much slimmer than most retailers, as little as 15 per cent or less, so any increase in credit card fees would hit them harder, industry observers said.
AmEx’s merchant fees are generally higher than either Visa or MasterCard, though Costco likely had a special deal because it offered AmEx exclusivity, observers said
“Costco has some of the smallest margins in retail,” said Alex Arifuzzaman, a principal in retail consulting firm InterStratics. “Half a percentage point increase (in merchants fees) increase would be a bigger deal to Costco than to other retailers.”
The Costco relationship represented a “sizable portfolio” for AmEx in Canada, Barnes said, without elaborating.
Costco Canada is one of Canada’s biggest retailers with estimated sales of $17.8 billion in 2013. Each store has about 110,000 members.
AmEx Canada said it planned to aggressively market its new cash-back card to Costco members as well as other Canadians as an alternative to the co-branded Costco card.
Cash-back is one of the few growing segments of the credit card loyalty market, AmEx Canada’s director of lending, Leonard Varaksa, said in an interview.
Cash back cards reward customers by giving them a percentage of their purchases back in cash rather than airline points or other incentives.
The end of the AmEx relationship signals a possible rift between the two industry giants, which have worked closely together in the past.
Both Costco and AmEx have ties to Berkshire Hathaway Inc., which is run by billionaire investor Warren Buffett. Berkshire is AmEx’s biggest investor and its vice chairman, Charles Munger, has sat on Costco’s board for more than 15 years. Berkshire also has a stake in Issaquah, Washington-based Costco.
Costco’s business model differs from most retailers in that customers pay an annual membership fee to shop there. Membership fees start at $55 a year.
Membership dues in 2013 made up $2.28 billion of the company’s over all $102.8 billion in revenue. Profits were just over $2 billion that year.
The company is due to release its 2014 results on Oct. 9.
- With files from Bloomberg