AmEx: Walgreen’s Changed Its Mind Without Pricing Concessions

American Express Co. made no pricing concessions to Walgreen's Co. to keep the pharmacy giant accepting AmEx cards, a top executive says. Responding to questions from securities analysts during a conference call yesterday to discuss AmEx's fourth-quarter and year-end 2004 results, Gary L. Crittenden, chief financial officer at the New York-based T&E company, said he has seen reports that AmEx chopped its discount fee for Walgreen's to get the chain to change its mind about dropping AmEx, but denied any such concession was made. “The pricing with Walgreen's is in alignment with the standard rate card we have [for that industry],” he said in answer to a question concerning whether the reports were true and whether the alleged pricing concession may have gone too far, potentially impacting the company's future results. “We have not deviated at all [from that rate card].” When asked what caused Walgreen's to reverse course, Crittenden said only that the retailer came to realize after its decision to stop accepting AmEx that the move may have been a mistake. It “wanted to give all its customers the opportunity to use American Express cards,” he said. Walgreen's announced last month it would stop accepting AmEx in all 4,681 of its stores effective Jan. 14, citing high acceptance costs relative to the average ticket it was seeing on the cards compared to average sales on other card brands, which are typically less expensive for merchants to accept (Digital Transactions News, Dec. 15, 2004). The chain also said AmEx transactions represented a small fraction of its total card-based sales. Walgreen's also accepts Visa, MasterCard, and Discover. But at the eleventh hour it announced it had signed a multi-year agreement with AmEx to go on accepting its cards (Digital Transactions News, Jan. 14). Terms of the new agreement were not released, and a Walgreen's spokesman would say only that under the new deal it now “made sense” for the Deerfield, Ill.-based merchant to keep taking AmEx. Since Walgreen's is the nation's largest drugstore chain and its ninth-largest retailer, any decision to stop accepting its cards would have been a significant blow to AmEx at a time when it is pursuing deals with Visa and MasterCard member banks to issue cards on its network. Worldwide, AmEx's average discount fee is 2.54%, down from 2.57% at the end of the third quarter last year and from 2.56% at year-end 2003, according to statistics the company released yesterday. In his remarks, Crittenden attributed the slight decline to a change in the mix of AmEx transactions toward more “everyday” transactions, which carry somewhat lower discount fees than the company's traditional T&E traffic. The company does not break out its merchant pricing by region. In other results, the total number of AmEx cards in circulation in the U.S is 39.9 million, up almost 10% from the year before, while U.S. charge volume reached $83.4 billion in the critical fourth quarter, up 15% from the year-ago period. In part, Crittenden said, the increase in cards is attributable to the activity of MBNA Corp., which began issuing cards last year on AmEx's network. He did not break out the number of MBNA/AmEx cards in circulation. AmEx has since reached a similar agreement with Citigroup Inc. under which the banking giant will also issue cards with AmEx (Digital Transactions News, Dec. 14). And non-bank rival Discover Financial Services Inc. has signed up GE Consumer Finance, a unit of General Electric Co., to issue cards branded with Wal-Mart Stores Inc. and Discover (Digital Transactions News, Jan. 24). Both AmEx and Discover have been seeking such deals with banks for at least a year, but their pursuit of Visa and MasterCard members heated up after a U.S. Supreme Court decision last October not to review a lower court's decision to strike down rules at the bank card associations that prohibited member banks from issuing cards with either non-bank network.