Practice Case | American Express, Slides of Marketing

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Practice Case

NEW CREDIT CARD LAUNCH

A large multinational credit card company has been considering launching its first store card, specifically within the grocery retail space. For reference, store cards, also known as private-label cards, are credit cards that consumers can use only at the store associated with that card (i.e., a Lowe's card can only be used at Lowe's, but not any other merchant). Should this credit card company launch a store card within the US grocery retail market? Background information Before you structure your thoughts, what immediate questions come to mind that can support your understanding?

Size of grocery retail market Predicted growth of grocery retail market Competitive landscape – private label players and grocery retailers Customers – segments, behaviors and trends Externalities – tech trends (e.g., auto checkouts), data regs. Expected product revenue Expected product costs – initial, ongoing, opportunity Client capabilities/advantage (e.g., bundle, cross-sell, supply chain) Deprioritized dimensions 1 Market opportunity Primary factors Sub-factors Things to consider: Should our client launch a private-label grocery card? What market specifics would you like to have more information on? 2 Profitability 3 Go-to-market strategy 4 Strategic alignment

Market considerations: Should our client launch a private-label grocery card? What insights can you derive from the charts above? 1 2015 685 2017 649 2019 2021 (f) 633 667 $M US Grocery Retail Market Store card lending as a % of total US credit card lending 3.25 3.75^ 4. 2.75 2.^

5.00 5.^

2015 2017

2019

Comp 2 Comp 1 Others Comp 3

Store Card Revenue Drivers

• Annual fees
• Interchange fees Definition: When a customer uses their credit card at a retailer, the retailer pays the credit card company a percentage of the transaction
• Interest on credit card past-due balances
• Cross-currency payment fees
• Cash withdrawal fees
• Lost card fees

For this case, let's focus on

just the first three drivers

Assume the credit card company would like to charge a $100 annual fee for this store card product Profitability considerations: Should our client launch a private-label grocery card? How would you estimate revenues from interchange fees? Take a moment to think about what are the primary drivers for interchange fee revenues. Non-exhaustive 2

How would you estimate this number? Profitability considerations: Should our client launch a private-label grocery card? Average amount paid via credit card to grocery retailer (i.e. "Average account balance") X Interchange fee percentage Interchange fees revenue estimate 2

Est. annual revenue per customer Annual fee $ Interchange fees $ Interest on balances? Total? $50k x 20% x 50% x 2% Profitability considerations: Should our client launch a private-label grocery card? What information do we need to estimate interest revenue from past-due credit card balances? 2

Interest on past-due credit card balance revenue estimate Average amount paid via credit card to grocery retailer (aka "Average account balance") x % of accounts projected to roll over (i.e. be past due) X Interest rate Reuse same assumption as before: $50K x 20% x 50% Assume 10% Profitability considerations: Should our client launch a private-label grocery card? Based on the assumptions above, what is the total revenue estimate? Assume 10% 2

Number of customers Fixed costs Product-related variable costs

• Upfront tech investment ($80M)
• Upfront processing capabilities ($20M)
• Salaried labor ($5M) (this is a recurring cost that takes place Day 1) - Marketing & customer acquisition ($10) - Credit loss (3% delinquency rate) - Rewards ($20)
• Number of US household grocery shoppers (80M)
• Average market share of top 5 grocery retailer (10%)
• Store card penetration rate across industry (1%) Volume Cost Profitability considerations: Should our client launch a private-label grocery card? With the data provided and assuming (1) we partner with a top-5 grocer and (2) there is no revenue or cost growth after year 1, would this product break even in 3 years? 2

Revenue Cost = Profit Year 1 Subsequent years $250 x 80k $105M + (80k x (10+20)) + (Revenue x 3%) $20M $105M + $2.4M + $600K $20M ~$108M^ =^ - $88M

Revenue Cost^ =^ Profit $250 x 80k $5M + (80k x (10+20)) + (Revenue x 3%) $20M $5M + $2.4M + $600K $20M

• (^) ~$8M = $12M Takeaway: It would take longer than 3-years to break even on the investment What are some ways to increase the revenue opportunity of the investment? Take a few moments to brainstorm a list. Profitability considerations: Should our client launch a private-label grocery card?

2

Headline Supporting Detail Next steps Investing in a store-brand grocery card is not recommended at this time given the company’s mandate to break even on its product investment by Year 3

• The grocery retail market is growing at 1% p.a., and private label card lending is also growing steadily
• However, even with a $100 annual fee, it would take the credit card company ~5 years to break even on a store brand product within the grocery retail industry
• That said, there are several ways the company could achieve a faster payback period (e.g., cross-selling higher margin products to its new customers, negotiating a high interchange fee) but additional diligence will need to be conducted to confirm these penetration rate / revenue increase opportunities
• Evaluate revenue uplift opportunities further
• Forecast card penetration growth rate over time (currently assumed no growth)
• Determine appetite for partnership with top-3 grocery retailers Recommendation: Should our client launch a private-label grocery card? Example recommendation

1. Take time upfront to clarify what question(s) you're solving for: you don't want to dive deep into a case interview without having aligned on scope
2. Don't be afraid to ask questions: asking questions throughout a case is just another form of engagement and it will ultimately help you gain a better understanding of the problem
3. Over-index on structure: whether it's writing algebraic formulas before executing math or bucketing qualitative insights into categories, structured thinking is critical for success
4. Be thorough, but also be “80/20”: be exhaustive in your explanations so we can understand your thinking, but also be targeted so we can understand how you prioritize
5. Drive the case: after conducting any analysis, be proactive in showing the interviewer that you know what analysis should come next to prove / disprove your hypothesis
6. Save time for the analyses: don't take more than 2 minutes to structure your thoughts upfront and budget only 1 minute for reading out your recommendation; we care a lot more about the qualitative and quantitative analysis that takes place between these two steps
7. Focus on quality over quantity when case study prepping: internalize your peer feedback from every practice case so that you don't make the same mistake twice or in the interview Case interview best practices from the Amex Strategy team