Is Costco a Good Deal for Citigroup Investors?

Media reports indicate that the new Visa card is a great deal for Costco Wholesale (NASDAQ: COST) members but it might be a bad deal for Citigroup (NYSE: C) shareholders.

If the news reports are accurate customers will love the new Costco Anywhere Visa Card, but it might not generate that much revenue for Citigroup. Nerdwallet writer Virginia C. McGuire outlined some of the Costco Anywhere benefits and they sound great.

Here are some of the rewards that Costco members that sign up for the Anywhere Visa will receive:

• 4% cash back on fuel purchases at Costco and other gas stations. There is a $7,000 a year limit on this.

 

• 3% cash back on restaurant and travel purchases apparently with no limit.

 

• 2% cash back on all purchases at Costco and Costco.com also apparently with no limits.

 

• 1% cash back on purchases made everywhere else also apparently with no limit.

All I could say after reading this list was “wow!” I was ready to run out and join Costco just to get that deal after seeing the cash back offers. It is easy to see why Payments.com described the deal as “too good to be true.”

In case you were wondering the Costco Anywhere Visa Card is supposed to become active on June 20, 2016, according to Citi’s website. The cards themselves are supposed to be shipped to customers in late May or June.

The Anywhere Visa is a great deal for Costco because it gives people a strong incentive to buy a $55 or $110 a year membership which generates more float for the club-store operator. Yet it may not be a good deal for Citi which as to give all that cash back to cardholders.

Can Citigroup Afford The Costco Deal?

This is certainly a good question to ask because Citigroup has not been doing that much better than American Express (NYSE: AXP) which lost the Costco contract last year.

Like Amex, Citi did suffer a revenue loss in 2015. It started with the year with $77.22 billion in revenue and finished with $76.35 billion in revenue. That means its revenue fell by $920 million over the course of 2015. That was not that much better American Express which saw its revenue fall by $1.37 billion in 2015.

Like American Express, Citi is struggling to maintain its revenue flow and presumably its market share. Costco’s worldwide membership base of 44.6 million members and 81.3 million cardholders certainly gives Citi access to more potential customers. These members also certainly have money – Statista estimated that 40.2% of the Americans who shopped at Costco in 2013 came from a household with an income of $200,000 or more.

From a marketing standpoint the Anywhere Visa sounds like a good deal for Citi, but can the credit card processor afford it? If you look at Citigroup’s net income the answer is yes. Citi’s income increased by nearly $10 billion between December 2014 and December 2015 the bank reported an income figure of $7.31 billion for fourth quarter 2015 and $17.25 a year later.

Yet some other figures were not so great at Citi, the bank reported a negative free cash flow of -$2.35 billion for December 2015. It also reported losing -$64.77 billion on cash from financing.

Citi has the Cash

Despite that Citi certainly has the cash to finance the Costco Anywhere Visa Deal. It reported making $39.75 billion in cash from operations in December 2015. Citigroup also had $133.1 billion in cash and short-term investments at the end of 2015.

That means Citi has enough cash to finance this deal and cover any losses from the launch of the new card. The bank has a lot of cash and a lot of float, therefore it can afford to take losses from the new card for months or even years before the deal starts paying off.

Citi is a Good Company and a Value Investment

The Costco Anywhere deal shows us that Citigroup is a really good company that is an excellent value investment. It has lots of float and revenue, more importantly the company has a management team that is making the tough decisions and risks necessary to increase future revenues.

Taking losses on the Costco Anywhere Visa deal now, enables Citigroup to tap a large affluent new customer base and to get access to a lot of potential new revenue. Costco reported revenues of $117.27 billion on February 29, 2016.

Marketing Lessons you can learn from Costco and Citigroup

More importantly this deal demonstrates that both Costco and Citi have a great grasp of marketing and consumer psychology. Costco’s management team understands by that adopting the more popular Visa brand for their credit cards they make their membership more appealing to all the people that do not have Amex cards in their wallets. They also give their customers another payment choice, which increases member loyalty and potential sales.

Citi gets access to a large base of new customers and a large amount of new revenues. It also develops new store branded card capabilities that could be applied to other retailers such as Kroger (NYSE: KR) or even Aldi. A potential benefit is that Citi ATMs or even branch banks might appear in Costco stores in the future giving the bank access to more potential customers.

This marketing prowess proves that both Citi and Costco are great companies. It also shows us that there is a cheaper way for value investors to take advantage of the Costco craze. Instead of Costco’s overpriced shares which were trading at $151.3 on April 8, 2016, you can buy Citigroup, a company with an 18.07% profit margin, a 5.39 EPS and an 8.46% return on equity that was trading at $40.81 a share on the same day.

The Costco Anywhere Visa deal proves that Citi is a true value investment. Its revenue and share price are sure to increase because of it.

If you want to see more the details of the Costco Anywhere Card checkout this Nerdwallet article or the Citigroup website.