Less Than Fantastic Plastic

Shortly after Harvey Golub moved from Minneapolis to New York to take over American Express Co.'s troubled credit-card division in July, 1991, he signed up at the company's fitness center to sweat off a few pounds. Yet he's been spending so little time there that, when Golub recently ran into the gym's fitness director, he didn't recognize him.

Golub has been working overtime trying to get the card business, the core of Travel Related Services, in shape. AmEx' chief cash machine, TRS is suffering from sharply eroding profits. No one can accuse Golub of sitting on his hands. On Oct. 22, AmEx unceremoniously dumped its ad agency of the past year, Chiat/Day/Mojo Inc., whose ads were criticized for being confusing and uninspired. The next day, AmEx announced a loss of $187 million for the quarter, because of a $342 million restructuring charge at TRS. Part will go to cut 4,800 jobs, 9% of AmEx's work force. "I think it's a positive. They are finally getting off of square one," says Guy Moszkowski, an analyst at Sanford C. Bernstein & Co.

SPECIAL DEALS. Cost-cutting will certainly help. AmEx predicts that the move will produce annual savings of $224 million during 1993, $356 million in 1994, and about the same amount in 1995. "Harvey is getting the company in position to lower pricing so he can kick the crap out of the bank cards," says E. Wilson Davis, an analyst at Gerard Klauer Mattison & Co.

But it's far from clear that these and other recent moves by Golub address the card division's broader strategic problems. AmEx' old strategy was delivering an upscale product that enabled the company to charge customers and merchants more because it offered great service. Yet what was right for the affluent 1980s isn't working very well in the value-oriented 1990s. AmEx has to compete with a horde of competitors offering all manner of special deals, discounts, rebates, and other features. The most visible result of the competition: AmEx is losing customers in droves, with cards in force dropping by 500,000 in each of the last three quarters (chart).

To date, AmEx hasn't done much beyond responding to competitors. And it's still marketing itself as a premium product, even while signing up lower-end merchants. On Oct. 26, the company announced that the holders could use the card at Kmart. "AmEx used to be a high-priced card with high-perceived value, only for the most affluent. They clearly stepped back from that. What has it been replaced with? I'm not sure," says card consultant Donald Auriemma, president of Auriemma Consulting Group Inc. "One thing is clear: Their strategy is not apparent to industry watchers."

ON THE OFFENSIVE. Golub denies that TRS lacks an effective strategy. A big believer in employee communications, he, along with TRS President Jonathan S. Linen, distributed a six-page memo to 53,000 AmEx employees on Oct. 26 entitled, "Elements of our Strategic Vision." In it, he paints in broad strokes ambitious plans to "earn 100%" of customers' "plastic spending." Yet the plan doesn't provide much in the way of specific new initiatives. His basic idea: "We must offer cardmembers a variety of ways to pay for virtually all their purchases--charge card, revolving credit, and perhaps, debit." AmEx will put special emphasis on Optima, its revolving credit card, and may even offer credit to AmEx cardholders. From now on, the memo says, TRS "will be far more oriented towards going on the offensive."

Golub insists the outlook is much better than critics contend. He blames the decline in cardholders on AmEx' difficulty in attracting new customers, rather than the more serious problem of cardholders simply canceling their cards, which he says is slowing down. Further, loyal cardholders are using their AmEx cards more. Average spending per cardholder in 1992's third quarter is $843, up 11% from $760 a year ago. "I feel great about spending per cardholder. We're seeing the first major uptick in a decade," says Golub. Much of that growth is due to its new Membership Miles program, which, like similar features offered by other card companies, gives users frequent-flyer miles.

Golub is also planning several pricing moves. To allay complaints by merchants, he will selectively rejigger some of the fees merchants pay to AmEx in early 1993, which will bring them in line with those charged by bank-card issuers. "I expect that a year from now, the average discount rate will be lower than it is today," says Golub.

Will these initiatives work? One obvious potential problem is simultaneously cutting costs while trying to maintain what Golub's memo calls AmEx' "world-class global service." To accomplish that, AmEx is phasing in the layoffs through 1994. But prolonging the uncertainly won't help employee morale.

THORNY CHALLENGE. Also problematical is Golub's idea of playing up the Optima card, which he sees as a major income source in the future. Although balances on the green card must be paid off every month, AmEx surveys indicate its cardholders are very interested in having a revolving credit product. But Optima, which carries a $15 fee, is a relatively obscure brand with only 3.2 million cardholders. It is accepted by far fewer merchants than Visa or MasterCard. To build up Optima to a major credit card would at the very least be costly.

Yet Golub's thorniest challenge is TRS' long-term strategy. The most graphic symptom of the company's strategic groping is its current turmoil with its advertising campaign. In the 1980s, its longtime ad agency, Ogilvy & Mather Worldwide Inc., successfully captured AmEx' upscale identity with such campaigns as one showing handsome photos of classy AmEx cardholders.

Last year, AmEx fired Ogilvy from its green card account and hired Chiat/Day/Mojo, which Golub now admits was "an error." AmEx believes Chiat's ads had failed to improve or even articulate its image. "There was tremendous confusion early in the game. Everybody at AmEx had their own point of view," says Martin Grant, a former Chiat executive who now works at ad agency D'Arcy Masius Benton & Bowles Inc.

Golub is clearly striving to dispel the confusion, not only about TRS' ads but its strategy. He's been taking positive steps. But it may be a while before he makes it back to the gym.