The changeover to the new Citigroup (NYSE: C) Visa card at Costco Wholesale (NASDAQ: COST) has degenerated into the biggest North American retail fiasco since Target's (NYSE:TGT) Canadian debacle. The comedy of errors has become a major embarrassment for both brands, but it poses a far greater risk for Citi than Costco.
Citigroup received more than 1.5 million customer-service phone calls about the Costco Everywhere Card during the first two days of the rollout, June 21-23, Bloomberg reported. Costco also took a lot of heat, with its Facebook page filling up with complaints about the Visa (NYSE:V) product.
Costco Members hate Citibank's New Visa
The complaints reveal a wide variety of problems with the rollout, that indicates a complaint of lack of planning at both companies. Here are some examples of what Costco customers think of the Everywhere Card and Citi:
"Costco + Visa = Disaster."
"Citi sent me six new Costco Visa cards. I activated each one successfully on the Citi/Costco web site. Now none of the credit cards work and Citi blames AMEX and says I have to deal with them."
"Did not expect a fiasco like this from Costco. We have not received the new Visa cards and wasted a couple of hours trying to talk to Citi personnel. Citi personnel could not even link my name to my Costco account number and hence cannot give me a card."
"Really frustrated with the card transition... got my first card with a misspelled name, then they sent another one after I called and it is still misspelled (albeit a different misspelling)... total disaster!"
"We are still waiting on cards. Citi promised yesterday to send them through FedEx the "next day". Here we are with no cards at 6:30 pm. Very irritating when a company (Citi) says they will do something and then they don't! Costco how do we get the cards????"
"Well, I was on hold for 15 mins to speak to someone about a charge that needs to be disputed and then the call ends after 15 mins without getting to speak to anyone."
"My Citi Costco card has the wrong member number on it! Every time I call Citi, I get disconnected. I'm going to BJ's."
The word disaster is an apt description of this mess. Not surprisingly some of the comments on the Facebook page used more colorful language that I will not repeat.
Citigroup Needs Costco more than Costco Needs Citi
The main casualty of this debacle will be Citigroup, because Citi needs Costco far more than Costco needs Citi. Financials indicates that Citi needs new sources of revenue and Costco does not.
Citigroup's revenue fell by $2.18 billion during the first quarter of 2016. Citi reported $76.35 billion in revenues in December, and $74.17 billion in March.
Citi's net income fell by $1.27 billion during the same period. The bank reported $17.24 billion in revenue in December and $15.97 billion in March.
Citi needs the additional revenue and net income the Costco Visa will generate. Its reputation is also taking a nasty hit. Companies considering Citi for branded credit cards will certainly remember this and some will say no.
Costco's Membership Revenue Threatened
The financial numbers also reveal that Costco can afford the card debacle, but Citi cannot.
Costco's revenue grew by $670 million over the last quarter. Revenues rose from $117.27 billion in February 2016 to $117.94 billion on May 31, 2016. That number indicates the credit card fiasco would have to drag on for several months to affect Costco's sales.
Any problem might reduce Costco's sales. It reported 0% sales growth for the 39 weeks that ended on May 29 in its last earnings report. During that period, Costco's US sales increased by 2% but its Canadian sales fell by 5%, that's bad because Costco switched to a Capital One (NYSE:COF) Visa in Canada last year. It also reported a 4% decrease in sales in its other markets.
Unlike Citi, Costco also reported a slight increase in net income during the same period. Net income increased from $2.309 billion in December to $2.38 billion in February, an increase of just $29 million.
That means something like the credit card mess could affect Costco's net income, but not necessarily its revenues. Interestingly enough, Costco might have revenue and sales increases in its next earnings report, because customers can now use any Visa credit or debit card at the club store.
The danger is to Costco's membership revenue, because irate customers might start canceling over Costco Anywhere. Although membership fees are not as vital to Costco as you might think, only $1.814 billion of the $80.345 billion in revenue the company made in the 12 weeks that ended on May 31 came from memberships.
Costco's Loss would be Wal-Mart and Amazon's Gain
The risk is the lost sales from customers that cancel their memberships, and shop elsewhere. A few rivals are well-positioned to grab some of Costco's business.
The biggest potential winner here is Wal-Mart Stores, Inc. (NYSE: WMT). Wal-Mart owns Costco's biggest US rival, Sam's Club, and it recently rolled out Shipping Pass. Shipping Pass is a membership deal that gives free - two shipping on many items ordered through Walmart.com for a year for a one-time payment of $49.99. My experience indicates that Wal-Mart is having some problems with the service, but it seems to have come at the right time.
Sam's Club, in particular, is well suited to cash in on Costco's troubles because it recently started accepting American Express (NYSE: AXP) cards. Amex was formerly the exclusive card at Costco and many customers liked it. Sam's would be well advised to launch a major marketing and advertising push emphasizing American Express right now.
Other potential winners include the privately held BJ's Wholesale Club, and Amazon (NASDAQ: AMZN). Amazon offers its own subscription service in the form of Prime and it sells almost everything Costco carries.
Only time will tell if Costco's famous customer loyalty can overcome customers' frustrations with Citigroup. If it cannot, both companies are in for serious problems in the near future.