In Forbes and elsewhere, Wal-Mart (NYSE:WMT) loudly announced Thursday that it will partner with Euronet (NASDAQ:EEFT) to offer retail money transfer. This service will operate only between Wal-Mart locations in the United States, which number almost 5,000. Pricing is competitive. The bare announcement was market-moving, crushing the shares of MoneyGram (NASDAQ:MGI) and sending Western Union (NYSE:WU) into a tailspin, while boosting Euronet.
The Forbes headline was remarkably inaccurate, because MoneyGram, not Western Union, is Wal-Mart's partner for in-store money transfer. Was the market's knee-jerk response accurate, as a forward-looking indicator? How should an investor assess the impact of this move by Wal-Mart on the money transfer industry? In analytically exploring the questions, the answers, and the money transfer showdown (the reason: the GOLD!), how many classic film references are needed? The answer is clear: the implications of this announcement
- are quantifiably negative for MoneyGram
- are accretive to Euronet in roughly the same amount
- are neutral for Western union
- represent a strategic and branding move, rather than a significant revenue growth initiative for Wal-Mart
- require several classic film references to fully explain
It is first necessary to establish a rational, rather than a sensationalized or misconceived, hypothesis about Wal-Mart's real goal. An investor must not fall into the trap of crudely assuming that just because Wal-Mart is a big company, Wal-Mart both intends to dominate, and quickly and easily will succeed in dominating, all money transfer. Just because Google, or Wal-Mart, or Facebook, or Amazon announces some initiative in some space, the correct analytical response must be more sophisticated than a hyperbolic, high-speed convergence prediction, a panic downgrade of everyone else in the space, and an early departure from the desk.
Despite its size, ubiquity, and pricing power, Wal-Mart does not even "dominate" its core retail space. While Wal-Mart is the largest retailer, Amazon, Target, Costco, Best Buy, Home Depot, Lowe's, well-run chain department stores like Macy's, Kohl's, and Nordstrom, and other retailers in various shapes and sizes continue to thrive in the world of Wal-Mart. Far from having their backs to the wall, these other retailers often significantly outshine Wal-Mart relative to industry expectations and benchmarks. Recent Wal-Mart performance has been bad, not dominant.
Wal-Mart earns about $477 B in annual revenue. As a group, Western Union, MoneyGram, and Euronet earn about $9 B in annual revenue, with Western Union earning about two-thirds of the total and the other two about one-sixth each. Given its high-profile core-business woes, it's not realistic that Wal-Mart would abruptly launch an all-out effort to dominate a peripheral space when even complete global conquest of the space (which Wal-Mart would never achieve) would yield so little relative to its size. No drill-down from the topline is needed to show that such a strategy would be foolish when fixing other problems logically must be a bigger priority.
What, then, is Wal-Mart thinking? My hypothesis assumes that at Wal-Mart, retail is the core business. Consumer financial services targeted at the typical Wal-Mart customer are a significant, but ancillary, business Wal-Mart executes to support the core. Wal-Mart indeed offers a variety of consumer financial services, mainly through partners - these partners' presence being another sign that Wal-Mart regards these operations as non-core. MoneyGram, since 2005, has been the main partner for the operation of the money transfer component of the Wal-Mart consumer financial services offering.
That's right: there is nothing new about money transfer at Wal-Mart. Wal-Mart is not launching a new service - it is competing with a service established by its own in-store partner, MoneyGram! Three key takeaways emerge:
- Money transfer at Wal-Mart is an ancillary business to the ancillary business of consumer finance
- MoneyGram is (or, was) the main operating partner of that doubly-ancillary business
- Wal-Mart has not introduced a new service at Wal-Mart to the consumer
- Wal-Mart is adding a Wal-Mart branded parallel offering in partnership with Euronet, while retaining the MoneyGram partnership, both in the same stores
But if money transfer is so minor to Wal-Mart, why was the announcement so loud? My guess is that Wal-Mart saw an opportunity to look bold and entrepreneurial by obscuring the difference between launching a new service and competing with its own in-store partner, while making something small look like a big production. The dominant press narrative about Wal-Mart is negative, about poor performance, declining sales and profits and stockouts, minor worker unrest, criticism for low wages, and a general decline story, so it's understandable why Wal-Mart would look to change it.
My point is not to minimize or criticize Wal-Mart or its decision, only to frame it in a correct context. Even a low-impact, non-core investment by a big player is smart, provided two conditions apply: someone else already fronted the risks and costs, and achieved results; and insignificant work and additional capital is required to leverage that past effort. In that case, the proceeds, regardless of size, are easy money waiting to be grabbed. Even if the proceeds are small, the rate of return is high.
For Wal-Mart, this is where MoneyGram comes in. As Wal-Mart's market research sock-puppet, MoneyGram has spent many years building a lucrative business, habituating customers to associate a Wal-Mart location with money transfer. Because of MoneyGram's work, Wal-Mart faces almost no uncertainty. Wal-Mart already knows how much revenue is earned by transferring money, via MoneyGram, from one United States Wal-Mart location to another. From there, it is easy to estimate how much Wal-Mart can afford to invest in introducing the service, how much it can offer its new operating partner, Euronet, and what the growth curve might look like. Wal-Mart also captures the option value of whatever upside and synergy with its other consumer finance offerings the re-branded domestic money transfer service could provide. This nothing-to-lose, ultra-low-cost venture is as riskless as it gets. Wal-Mart would be foolish not to do it, and MoneyGram is powerless to oppose it.
On February 11, MoneyGram issued a press release detailing 2013 results, including almost $1.5 B in total revenue, or 10% growth over 2012, including 7% growth in transfers where the sender and receiver are both in the United States. These results were impressive. The scary part is that 13% of the revenue ($190 M) was earned making domestic MoneyGram transfers where Wal-Mart stores are at both ends of the transfer. That incremental sum is the size of the business Wal-Mart just partnered with Euronet to seize - entirely - from MoneyGram. For Euronet, which is about the same size as MoneyGram, $190 M would be a 14% revenue increase from just a single deal, explaining why the stock popped on the news. Wal-Mart just sent Euronet a nine-digit MoneyGram.
Final results will probably end up somewhere in between - only buttressing the argument that this initiative is truly small to Wal-Mart. The $190 M is, of course, MoneyGram's share of the total partnership revenue. The Wal-Mart share of the revenue from the same money transfers (even in a hypothetical 50-50 split, $190 M would be too small relative to Wal-Mart to be broken out in any publicly available analysis) will be cannibalized, replaced by new partnership revenues from Wal-Mart-branded money transfers executed by Euronet. For Wal-Mart, these results are probably more about strategic expansion and consolidation of the branded consumer finance offering, with little investment or risk than the minuscule size of the financial return. Driving foot traffic to the consumer finance service by offering money transfers will cross-sell more financial services for Wal-Mart, and will better encourage spending of any received money in the Wal-Mart.
Wal-Mart is the largest MoneyGram agent. Smart investors know what MoneyGram just learned the hard way: "signing that big Wal-Mart deal" is not a silver bullet. It now becomes clear why Goldman Sachs and its PE co-investor were publicly looking to dump their controlling stakes in MoneyGram not long ago. Wal-Mart is a dangerous partner, because it always has all the leverage. Meanwhile, MoneyGram is trapped, in no position to exit, as its relationship to Wal-Mart is like that of Lando Calrissian to Darth Vader: Wal-Mart is altering the deal, and MoneyGram might best pray that it is not altered further.
The Western Union
Does the Wal-Mart move impact Western Union? From a direct perspective, the answer is clearly no. Western Union has zero business to lose at or through Wal-Mart that it wasn't already losing for the past decade to the MoneyGram partnership presence in every domestic Wal-Mart. Thus, the competitive impact on Western Union of MoneyGram's $190 M in revenue from domestic transfers to and from Wal-Mart locations - whatever that impact is - has been baked into Western Union results for years. It does not incrementally injure Western Union for Wal-Mart to take some quantity of the money transfer business entirely from MoneyGram at the front end, and give it instead to Euronet at the back end.
Western Union earns over $5 B in annual revenue, about four times MoneyGram's total, without Wal-Mart. Western Union has only the most incidental exposure to Wal-Mart. SunTrust Bank partners with both Western Union (to offer money transfer at bank branches) and Wal-Mart (to operate bank branches in the Wal-Mart). This is the only way a Wal-Mart store location is also a Western Union agent location (at the SunTrust Bank branch, inside the Wal-Mart). If anything, this shows Western Union's strength. It has found a back-door way to be present in at least some Wal-Mart locations, despite the MoneyGram partnership.
Of course, Western Union does partner with other retailers, including recently, the Walgreens (WAG) drugstore chain, to offer money transfer inside their retail store locations. These partnerships are vital to Western Union. Drugstore partnerships are also smarter, because drugstore chains are smaller than Wal-Mart and Western Union is bigger than MoneyGram, resulting in something more like a partnership of equals. This reality reflects Western Union's competitive superiority to MoneyGram: the better retail partners for money transfer - not just considering size, but in the most comprehensive and strategic sense of what is a "good partner" - prefer working with the stronger brand of Western Union, forcing MoneyGram, the also-ran in money transfer, into the gaping jaws of Wal-Mart.
Might customers now be pulled away from Western Union agents, and into Wal-Mart, to send and receive money the Wal-Mart way? Again, for the same reasons outlined above, probably not to any incrementally greater extent than MoneyGram was already able to achieve. Sending or receive money at a Wal-Mart location has been possible for years, so from Western Union's perspective, what just changed? Not much, except the entertainment value of watching its main competitor forced to compete with Wal-Mart at Wal-Mart.
Time will tell, but a contrarian argument could even be made that Wal-Mart's move could do enough damage to MoneyGram - possibly more to the bottom line than to the top line - that it ends up benefiting Western Union by making MoneyGram less able or flexible to respond to its larger and more successful competitor. To summarize, my prediction is that MoneyGram's results will suffer and its shares will remain depressed, Euronet is the winner, Western Union's shares will fully recover with no impact on results, and Wal-Mart is making a minor move to add to and brand-consolidate its consumer financial services offering, while taking some free money and an unusual opportunity for good PR.
Disclosure: I am long WU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no positions in any other stocks mentioned and no plans to initiate a position.