Costco's biggest mistake in 2016 so far

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Costco (NASDAQ: COST) makes very few mistakes.

The company has a good reputation as an employer and strong loyalty from its customer base. The warehouse club has accomplished that by being steady and predictable. Merchandise may change and deals will vary, but the company consistently offers good prices on a wide variety of merchandise and services.

In June 2016, however, the warehouse club hit a bump in the road. It made a mistake which may have been unavoidable, but like a car crash you see coming but can't avoid, Costco could not escape, it could only work to deal with the aftermath.

What did Costco do?

The chain made the decision to switch its rewards credit card from American Express (NYSE: AXP) to Visa (NYSE: V) over a year ago. That deal made Visa not just Costco's preferred card, it made it the only one the company would accept. Offering exclusivity almost certainly sweetened the deal for the warehouse club and its customers, but the chain made a big mistake in how it enacted the deal.

Instead of negotiating a period when it would accept both Visa and American Express, it made an abrupt switch. On June 19 shoppers could use their American Express rewards cards at the chain and then the next day, those cards went dead and the new Visa cards provided by Citigroup (NYSE: C) became active.

It was a harsh transition that led to mild chaos at checkout in some store locations while also contributing to 1.5 million calls to Citigroup, according to a spokeswoman for the card issuer.

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Millennials' favorite retail brands
24. Levi's

23. Calvin Klein

Photo via Getty

22. Ralph Lauren

21. Michael Kors

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20. Walmart

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19. Macy's
18. Vans

17. Old Navy

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16. Converse

15. Adidas

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14. Gap

13. Under Armour

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12. Bath & Body Works

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11. Nordstrom

10. Target

Photo via Alamy

9. Urban Outfitters 
8. J.Crew
7. H&M

6. Sephora

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5. Lululemon

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4. Zara

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3. Forever 21

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2. Victoria's Secret

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1. Nike

What could Costco have done?

Ideally, the chain would have arranged for a period where it accepted both credit card brands and both rewards cards. During that period, anyone paying with an American Express could have been given a flier on the switch. If that was not something American Express or Citigroup would have approved, the company could have done more to let consumers know the change was coming and it was going to be abrupt.

Rewards cardholders did of course receive their new cards in the mail -- in most cases well ahead of the June 20 switch -- and stores did have signage about the change. How noticeable those signs were and whether American Express users, especially ones who are not rewards cardholders, noticed them remains a question.

Where do things stand now?

Costco made a mistake by not having an overlap period, but it's very possible that its new partner, VIsa, and its jilted former partner, American Express, forced the transition to occur abruptly. That means that Costco made a mistake, but it was one it was forced into.

On the plus side, when you rip a Band-Aid off quickly, the pain is intense, but short. That was apparently the case for Costco as Citigroup spokeswoman Jennifer Bombardier told The Motley Fool that the problems were addressed quickly.

"With any conversion of this magnitude and a brand this beloved, call volumes were unprecedented," she acknowledged. "As a result, some customers experienced longer-than-desired wait times in the first few days of the launch. In response, we swiftly took action to better meet the demand for the new cards and since then, average call wait times have lessened significantly."

Those comments were made on July 20, a month after the switch from American Express to Visa had occurred and Bombardier noted that not only had the problems largely been solved, people were signing up for the new card as the previous one had not been offered since November 2015.

"Consumer interest and engagement with this card has been extraordinary," Bombardier wrote. "On Day One, approximately 60,000 applications were processed -- more than triple any one day in Costco's 17-year history with Amex. Since then, there have been over 550,000 total applications to date and we don't anticipate the demand to diminish anytime soon."

A mistake was made, but Costco and its partner, Citigroup, owned it and worked hard to correct it quickly. That may have cost the company a little bit of goodwill, but unlike many retailers, it has plenty to spare.

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TORONTO, ONTARIO, CANADA - 2016/03/08: Sears store entrance, is an American chain of department stores. Known for selling high quality clothing article from shoes to shirts. (Photo by Roberto Machado Noa/LightRocket via Getty Images)
Macy's Inc. signage is displayed at a department store in New York, U.S., on Monday, Feb. 22, 2016. Macy's Inc., the largest U.S. department-store company, is scheduled to report fourth-quarter 2015 earnings before the opening of U.S. financial markets on February 23. Photographer: Michael Nagle/Bloomberg via Getty Images
J.C. Penney Co. signage is displayed outside of a store at the Gateway Shopping Center in the Brooklyn borough of New York, U.S., on Saturday, Aug. 8, 2015. J.C. Penney Co. is scheduled to release earnings figures on Aug. 14. Photographer: Michael Nagle/Bloomberg via Getty Images
UNITED STATES - JUNE 09: Customers enter the Dillards department store at Parkdale Mall, in Beaumont, Texas, Wednesday morning, June 9, 2004. A judge declared a mistrial in a lawsuit brought against Dillard's Inc. by 17 black shoppers in Texas who claimed that security guards at the department store chain harassed them because of their race. (Photo by Scott Eslinger/Bloomberg via Getty Images)
MIAMI, FL - APRIL 19: A Nordstrom sign is seen outside a store on April 19, 2016 in Miami, Florida. Nordstrom on Monday said in a cost-cutting measure they are expecting to lay off 350 to 400 people. (Photo by Joe Raedle/Getty Images)
The sign outside the Kmart store is seen in Broomfield, Colorado November 19, 2009. Sears Holdings Corp posted a narrower-than-expected quarterly loss November 19, 2009, helped by the first increase in same-store sales at its Kmart unit in four years. REUTERS/Rick Wilking (UNITED STATES BUSINESS)

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Daniel Kline has no position in any stocks mentioned. He wonders why Costco offers samples of things people have clearly already tried. The Motley Fool owns shares of and recommends Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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