American Express Case Study Situation

American Express Case Study SITUATION ANALYSIS Analysis of the Firm American Express (NYSE:AXP) is one of the world's leading providers of premium travel-related services and payment processing system support services globally. American Express (Amex) has grown steadily through a series of mergers, acquisitions and later divestures to focus entirely on their premium card and payment processes services (Taube, Gargeya, 2007). AMEX concentrates today on a series of financial products and services to individuals, small businesses, and large corporations including the Fortune 500, and higher education institutions globally.

The company operates on a global scale, yet the majority of its revenue is generated in the U.S. For an analysis of American Express Revenues and Earnings before Interest and Taxes, see Table 1: American Express Geographic Analysis. In an effort to bolster foreign revenue, Amex reorganized to have operating segments re-aligned to a global consumer and global business-to-business structure (Taube, Gargeya, 2007). The company also completed this re-organization for corporate accounts and ancillary businesses as well. As part of the re-organization, Amex placed its U.S.

Card Services unit (USCS) and it's International Card Services (ICS) within the global consumer group with the intent of creating a more uniformly focused culture on customer service and recovery in this sector (Giglio, Michalcova Yates, 2007). Of all services divisions of the company, USCS is the most well-known as it concentrates on the issuance of cards to consumers and the offering of services to small businesses in the U.S. through 2007, and since the reorganization, globally (Taube, Gargeya, 2007).

As part of the re-organization the company has also integrated in its Travel Related Services (TRS) unit with its U.S. banking subsidiaries to include the icon of their brand, their consumer charge cards. From the classic green American Express personal card, to the American Express Gold, Platinum and Centurion Card, to the revolving cards including Blue with is the processor of Optima, this division manages consumer accounts.

What is remarkable is that the average spending $8,360 per Amex card is four times that of competitor Visa's average spending of $2,470 per card and MasterCard's $1,960 per card as well. This point made in the case quantifies how powerful the Amex brand is within the upper income segments of the American credit card market, and also shows significant potential for global growth with affluent consumers. To continually pursue global growth the company contracted in 2007 with Harrods to offer a customized American Express card for that store as well (Taube, Gargeya, 2007).

Amex realized that in addition to these customized cards, the need to increase the number of redemption services was also critical, and as a result they added 1,400 redemption partners globally since the reorganization (Taube, Gargeya, 2007). This network is comprised of 80 different partners in each country with only a fourth of them in the travel industry (McClellan, 2007).

One of the strategic objectives as defined in the case study and apparent from subsequent research is the development of the Global Commercial Services (GCS) and Global Network and Merchant Services (GNMS) divisions so they would be more aligned with the needs of business-to-business (b2B) clients globally (Taube, Gargeya, 2007). The GCS is specifically focused on transition-based services, and has been one of the key factors that is responsible for the increasing Revenue Per Employee as shown in Table 2: American Express Company Ratio Analysis.

Globalization efforts for American Express have been constrained by the lack of marketing effectiveness (McClellan, 2007) in specific regions of the world and the scalability of the Global Network and Merchant Services (GNMS) which has been constrained in its profitability by the current financial crisis and the dollar's lack of strength as a global currency. Marketing Strategy The case study provides a progression of the marketing strategy for Amex from its founding in 1957 through present day, with the maturation from the predominantly male business traveler, to affluent women, and also families.

The shift in messaging to leisure travel and experiences in the 1987-2002 timeframe was the beginning of the company's move to more lifestyle messaging over their heavily aspirational approach of using the "Do You Know Me?" campaign during the 1975-1987 timeframe. The progression through "Make Life Rewarding" to My Life, My Card messaging that concentrated on rewards and incentives to stay loyal to the Amex brand were the primary marketing strategy through the years of 1996-2007.

In the midst of the global re-organization (Taube, Gargeya, 2007) the company moved to celebrity endorsements. The decision to rely on Tiger Woods had been proven in previous endorsement efforts the golf legend has been involved in (Farrell, Karels, Monfort, McClatchey, 2000) and therefore the risk was seen as minimal.

With the strategy of using "Are You Are a Card member?" The company embraced the concept of how unique each card member is and how their lifestyles exemplify the branding concepts of Access, Advocacy, Accountability and Affiliation - all critical components of the company's messaging and membership messaging platform. As the marketing strategy has progressed, it has however lacked the necessary aspects of a marketing campaign for fuel aspirational use.

The typical Amex card hold spends $8,360 per year on average, a spending rate that only 5% or less of the most affluent Americans can sustain. In fact the marketing strategy is a paradox both today and in the timeframes of the case study. There is on the one hand the need to gain greater loyalty from their existing customer base yet also expand the total available market by providing card services to income levels below their target market.

This also represents a challenge for the company in terms of taking on relative levels of risk as well. To move further down the income scale, Amex would have to take on greater financial risk of default given their cards being predominately honored by merchants who can afford their fees. Amex has a strong brand at the higher end of the market yet also is almost blocked from going down-market given the fact that 70% of their revenue is generated from retailer and establishment fees.

In this sense, Amex is trapped from moving down the income levels both due to risk and the constraints it places on retailers to pay higher fees to accept its card relative to competitors VISA and MasterCard. The Optima experience the company had also highlights the risk of opening up the Amex network of retailers and establishments to income levels of customers who do not pay their entire balances off completely very month, which is a core assumption of the company today.

The marketing strategy has continued, in spite of these major limitations, to concentrate on celebrity endorsements, the use of integrated marketing communications (IMC) strategies (Hosford, 2009) and the increasing use of the Internet for capturing new accounts and serving existing ones. What has been missing however is a universal theme that foreign consumers can relate to and identify with. Amex continues to struggle globally from a marketing standpoint both within the case study and today (McClellan, 2007) due to the inability to attract profitable customers for life.

As the financial analysis shows in Table 2, the company is actively serving many customers, yet not achieving profitable growth. This is because the marketing strategies excel at attracting aspirational members, yet does not do enough to, even with data mining as mentioned in the case, to find long-term, profitable customers. Organizational Goals The organizational goals of Amex center first and foremost on selecting key investments that will allow for long-term revenue and profit growth, without sacrificing the gains made in emerging global businesses.

This is apparent in the approach Amex is taking in terms of its globalization strategy (Taube, Gargeya, 2007) and its approach to trimming back acquisitions earlier in the 20th century as the case study suggests. Second, Amex is focused on the business process management (BPM) and process re-engineering in an attempt to ensure all of its divisions perform together in unison. This is evident from the discussion in the case study with regard to the re-organization of 2007 and the integration of services into divisions that allowed for greater sales internationally.

A third organizational goal is to nurture customer loyalty over time, fostering this through lessons learned from data mining and customer research. Taken together, Amex is striving to find new avenues of profitable growth while at the same time nurturing and growing lifetime customer value.

Marketing Mix The product, price, promotion and distribution or place, or marketing mix analysis of Amex exemplifies an organization that has tested alternative services to its core business, yet has found that its unique value proposition is in providing credit card and travel-related services for affluent individuals, small businesses and larger corporations and institutions worldwide. These services include credit card processing, customized credit card programs for merchants and banks, and payment processing services globally.

Across the spectrum of services the company provides, the pricing models concentrate on higher-end, value-added service offerings capable of supporting their higher gross margin-based business model. Table 2, American Express Company Ratio Analysis, illustrates how profit margins are plummeting for the company when EBITA %Margin is taken into account in the analysis. Clearly Amex has a major problem in the pricing area of their business today. In terms of promotion, the company's continual evolution as a brand that stresses an aspirational message also presents a dilemma to the company as well.

Attracting consumers who may not have the disposable incomes to fit the aspirational spending that the Amex brand portrays requires credit scoring, data mining to alleviate risk, and more precise marketing as well. From this standpoint, if the aspirational selling of their brand works too well the company will also find that its image with its core customer base suffers as well.

For Amex they must make their brand become part of the personas of their most loyal customers while also underscoring the aspirational aspects of their services tempered with reality (Zalaznick, 2008). Of the four aspects of the marketing mix, Amex continues to struggle with distribution or place, when taken in the context of global marketing (Taube, Gargeya, 2007).

Attempts to increase distribution globally through partnerships created through its Global Commercial Services (GCS) and Global Network and Merchant Services (GNMS) have been only marginally effective as the financial analysis in Table 1: American Express Geographic Analysis illustrates. SWOT Analysis The following is an assessment of Amex's strengths, weaknesses, opportunities and threats. These exemplify the extent of the challenges for the company as they attempt to move into new markets globally while staying profitable in their core markets.

Strengths Highly unique and differentiated business model that is spend-centric with compensating revenue from retailers and merchant partners. This is highly unique in the credit card and credit processing industry and provides Amex with a recurring revenue stream that is based on the extent of their scalability of operations and success rate in getting card holders to charge more on their personal and corporate accounts. The uniqueness of this business model also is seen in their approach to defining merchant services and partnerships globally as well.

Exceptionally strong brand with strong aspirational value. This is one of the most unique differentiators of the company globally, as its brand connotes Access, Advocacy, Accountability and Affiliation. The essence of the brand is approachable aspirational spending, and has a strong message of success associated with it as a result (Zalaznick, 2008). Travel Operations in Corporate Accounts. This is one aspect of the Amex business model that in the context of Fortune 500 companies presents a nearly unassailable competitive position relative to other competitors in corporate travel services.

Weaknesses Lack of point-of-sale debit card support and no plans to capitalize on this high growth of the market. This is one of the most glaringly absent aspects of the Amex strategy, as the case study indicates the rpaid growth of debit card services yet does not show any intention on the part of Amex to capitalize on it. This ties back to the paradox the company is facing in terms of attempting to stay up-market with higher income customers yet needing to migrate down-market to capture greater market share.

Plummeting sales of Travelers' Cheques. The core business that Amex was founded on is faltering and is going to be gone within ten years. This is a major weakness as well, and could easily be solved if the company moved to support more debit-card-based travel services. Increased financial risk from less-than-perfect credit card holders. In its attempts to move down-market. Amex has experimented with a variety of payment plan-based cards products and services, yet each have failed and cost the company money.

This is because the internal systems for the company are oriented and aligned with card customers who pay their entire balances every month. Opportunities Innovative new products including debit card support globally. There is significant opportunity move more into the more lucrative areas of debit card purchases tied to bank accounts where Amex could charge a processing fee for handling the transaction. Second, Amex could create a clearinghouse for all debit card transactions through their most loyal retailers. The opportunities for growth in this area of the market are significant.

The company must move aggressively in these areas to continue to grow. Expansion opportunities in BRIC nations. The nations of Brazil, Russia, India and China together present significant opportunities for global expansion for Amex. Using the Global Commercial Services (GCS) and Global Network and Merchant Services (GNMS) to launch new services into these markets is critical. Threats Credit crisis is going to have a debilitating effect on the company.

As has been seen in the news of the company (Stacey, 2009) the credit crisis has forced the most affluent customers Amex has to curtail spending, leading the company to let 7,000 employees go this year. There is also the challenge of keeping their retailers loyal in the midst of plummeting revenues that the card is bringing through distribution channels. Interchange fees are going to be a political issue for Amex globally in 2009 and beyond. With the EU, Australia and many states in the U.S.

passing legislation to limit interchange fees, Amex will find this will significantly impact their margins, which are already in a state of decline as seen in Table 2: American Express Company Ratio Analysis. Increasing competitive pressure from VISA, MasterCard and Regional Card Providers. Competing with Capital One, JP Morgan Chase, Citibank, Bank of America and others is tempered by the global credit crisis, yet all of them share a common attribute of needing to generate incremental revenues quickly to stay in business.

Today the strategy is to increase fees to the consumer, yet Congress is moving to block this. Over time there will be consolidation in this industry as consumers continue to cut back on their spending as the economic conditions stay uncertain. Analysis of Industry, Demand & Competition According to industry estimates (Stacey, 2009) the U.S. market achieved just over $2.2 trillion in purchases and cash advances in FY 2008. Per the case study the average American has 4.4 credit cards, with outside sources used in the analysis showing the average has dropped to 3.5.

Retail cards are dramatically dropping in use, from 2.8 per consumer in 2008, projected to drop to 1.3 in 2010. Debit card use is at 1.6 per capita in the U.S. The net effect of these statistics is that the typical American consumer has 8 different types of payment cards on average. The major market segment for these cards is within the second highest and highest income quintiles (accounting for about 29% of the market respectively) as is shown in Figure 1, Distribution of Credit Card Holders by Income Statement.

The individuals within these groups tend to purchase more often, and have the ability to pay back debt. The highest income quintile is Amex' primary target market and is comprised of those individuals that have a household income greater than $100,000. The second-highest income quintile are those with an income of between $75,000 and $100,000 and are the main aspirational segment that Amex most often appeals to. The two lowest income quintiles account for 5% and 13% are younger consumers who prefer to use debit cards.

From the studies of credit card use (Borzekowski, Kiser, Ahmed, 2008) several interesting findings emerge. First, Baby Boomers over 50 years of age are more likely to have a credit card than those 25 to 49, yet use them less frequently, often paying back the entire balance. This is due to the fact that the younger customer groups are purchasing more durable goods (Borzekowski, Kiser, Ahmed, 2008) and they will also tend to purchase more often on impulse. Second, nearly 75% of American college students have a credit card with the average balance being $2,000.

As can be seen from this analysis there is a strong aspirational aspect to credit card purchasing that is a market dynamic Amex has been able to consistently capitalize on.

Figure 1: Distribution of Credit Card Owners by Income Segment Market Segment Share (2008) Second highest income quintile Highest income quintile Middle income quintile Second lowest income quintile Lowest income quintile Source: Analysis of 10Ks, 10Qs filed by American Express with the Securities and Exchange Commission on a quarterly basis American Express achieved 10% market share in 2008 relative to entrenched competitors JPMorgan Chase and Banks of America. The strengths of JPMorgan had been their aggressive use of debt investments to manage the losses in their card division.

JPMorgan however has fallen victim to the credit crisis as has Citigroup. Their weaknesses are more structural from a financing standpoint. Amex has been able to withstand this dismantling of their two competitors due to their loyalty of their customer base and their unique spend-based business model.

Figure 2: Market Share by Competitor Major Player Market Share Range JPMorgan Chase & Company Bank of America Corporation Citigroup, Incorporated American Express Company Source: Analysis of 10Ks, 10Qs filed by American Express with the Securities and Exchange Commission on a quarterly basis PART II: IDENTIFICATION of PROBLEM/OPPORTUNITY The fundamental problem that Amex today has is the dwindling spending occurring in its most profitable customer segment.

This is clear from an analysis of their financial performance as shown that the retention of the highest value customers in terms of profitable spending has to be the top priority followed by the growth of the installed base. Amex cannot afford to lose focus on these two priorities are move down-market as past strategies have attempted to do.

PART III: DEVELOPMENT of ALTERNATIVES The two most critical alternatives facing the company is to first focus on retaining and growing their most profitable customer segments first, and second, growing their customer base by concentrating on newly affluent customers. Of these two alternatives, the first concentrates on increasing retention of their existing customer base and providing additional services to assist them during the economic crisis in progress.

This first alternative requires Amex to surpass their use of data mining and work to define entirely new psychographically-based segments of higher income customers who have strong credit ratings to sustain the core business model of the company. This focus on customer retention is key to their continued profitable growth. The second alternative focuses on the need to recruit entirely new customers who are aspirational yet also have incomes that can align with the retailers and establishments that the Amex card is used in.

PART IV: EVALUATION of ALTERNATIVES Retention of Existing Customers Through More Targeted Customer base Marketing Target new Customers Globally Through Aspirational Messaging and Marketing Strengths: Capitalize on knowledge of the existing customer base through the use of data mining and continued profitability analysis Create more value-added services that appeal to the unmet needs of the most loyal Amex customers Provide service extensions to existing offerings to give card holders the opportunity to create their own experiences "Create Your Own Dream Vacation" could be one theme Focus on adding more value and bundling services for corporate accounts Create more insight into the customer base through more effective use of psychographics and research Capitalize on loyalty and reward it in the top 10% of the customer base.

Cost efficient as the data exists already on these customers.

Strengths: Organic or new growth is by far the most profitable as it infuses entirely new customer spending throughout the retailing and merchandising network Using data mining to profile new potential accounts will provide the company with insights into how to combat the global recession with much more precision than before Capitalize on the aspirational aspects of their brand, concentrating on the image of being affluent and "accomplished" even in the midst of difficult economic times Potential to infuse new countries globally with growth through targeted campaigns for new accounts Use of the Internet and its effects on customer attraction and trial will be quantified through this program more thoroughly than ever before.

Weaknesses: No new revenue growth and the potential of existing customers still pulling back from spending Lack of visibility if the plan is working or not for at least three months until an initial promotion is completed Lack of enthusiasm on the.