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Costco's Biggest Mistake in 2016 So Far

By Daniel B. Kline - Aug 10, 2016 at 7:36AM

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The chain steered into a crash, but it has recovered well.

Costco experienced some customer problems when it changed credit card providers. Image source: Author.

Costco (COST 3.13%) makes very few mistakes.

The company has a good reputation as an employer and strong loyalty from its customer base. The warehouse club has accomplished that by being steady and predictable. Merchandise may change and deals will vary, but the company consistently offers good prices on a wide variety of merchandise and services.

In June 2016, however, the warehouse club hit a bump in the road. It made a mistake which may have been unavoidable, but like a car crash you see coming but can't avoid, Costco could not escape, it could only work to deal with the aftermath.

What did Costco do?

The chain made the decision to switch its rewards credit card from American Express (AXP 3.79%) to Visa (V 4.29%) over a year ago. That deal made Visa not just Costco's preferred card, it made it the only one the company would accept. Offering exclusivity almost certainly sweetened the deal for the warehouse club and its customers, but the chain made a big mistake in how it enacted the deal.

Instead of negotiating a period when it would accept both Visa and American Express, it made an abrupt switch.  On June 19 shoppers could use their American Express rewards cards at the chain and then the next day, those cards went dead and the new Visa cards provided by Citigroup (C 6.07%) became active.

It was a harsh transition that led to mild chaos at checkout in some store locations while also contributing to 1.5 million calls to Citigroup, according to a spokeswoman for the card issuer.

What could Costco have done?

Ideally, the chain would have arranged for a period where it accepted both credit card brands and both rewards cards. During that period, anyone paying with an American Express could have been given a flier on the switch. If that was not something American Express or Citigroup would have approved, the company could have done more to let consumers know the change was coming and it was going to be abrupt.

Rewards cardholders did of course receive their new cards in the mail -- in most cases well ahead of the June 20 switch -- and stores did have signage about the change. How noticeable those signs were and whether American Express users, especially ones who are not rewards cardholders, noticed them remains a question.

Where do things stand now?

Costco made a mistake by not having an overlap period, but it's very possible that its new partner, VIsa, and its jilted former partner, American Express, forced the transition to occur abruptly. That means that Costco made a mistake, but it was one it was forced into.

On the plus side, when you rip a Band-Aid off quickly, the pain is intense, but short. That was apparently the case for Costco as Citigroup spokeswoman Jennifer Bombardier told The Motley Fool that the problems were addressed quickly.

"With any conversion of this magnitude and a brand this beloved, call volumes were unprecedented," she acknowledged. "As a result, some customers experienced longer-than-desired wait times in the first few days of the launch. In response, we swiftly took action to better meet the demand for the new cards and since then, average call wait times have lessened significantly."

Those comments were made on July 20, a month after the switch from American Express to Visa had occurred and Bombardier noted that not only had the problems largely been solved, people were signing up for the new card as the previous one had not been offered since November 2015.

"Consumer interest and engagement with this card has been extraordinary," Bombardier wrote. "On Day One, approximately 60,000 applications were processed -- more than triple any one day in Costco's 17-year history with Amex. Since then, there have been over 550,000 total applications to date and we don't anticipate the demand to diminish anytime soon."

A mistake was made, but Costco and its partner, Citigroup, owned it and worked hard to correct it quickly. That may have cost the company a little bit of goodwill, but unlike many retailers, it has plenty to spare.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$429.48 (3.13%) $13.05
American Express Company Stock Quote
American Express Company
$159.04 (3.79%) $5.80
Citigroup Inc. Stock Quote
Citigroup Inc.
$52.77 (6.07%) $3.02
Visa Inc. Stock Quote
Visa Inc.
$207.56 (4.29%) $8.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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