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In your 1996 annual report , Mr. Buffett, you noted that companies like Coca-Cola and Gillette were "inevitable ." And you just confirmed your point about Coca-Cola and Gillette. My question to you is: do you share the same opinion about American Express? So, do you consider American Express, quote, "inevitable"?
American Express is an interesting case study because it has... We always think in terms of mindshare versus market share, because if there's a place in the mindshare, then there's market share. Almost 75% of people in the world have some idea about Coca-Cola. And the vast majority of them are positive.
Everyone in California has some idea about See's Candy, and the vast majority of them are positive. The challenge is to engage even more Californians, or the world, in Coke's case, over the years, and for those perceptions to become increasingly favorable as time goes on. If we achieve that, everything else will follow.
And consumer goods organizations understand this. For many years, American Express has held a special place in people's minds due to its financial integrity and ubiquity. When banks closed in the early 1930s , American Express traveler's checks somewhat replaced banking during that period. The worldwide recognition of the name meant that when American Express sold traveler's checks, for many years their two main competitors were what is now Citicorp, First National City, and Bank of America.
And even though American Express charged 1% on traveler's checks, and you had two other major organizations—Citicorp, imagine that, and Bank of America, and Barclays and Thomas Cook had their checks, American Express still held two- thirds of the market 60 or 70 years later, two- thirds of the world market, charging more for the product than other very well-known competitors.
Anytime you can charge more for a product and maintain or increase market share against well-established, well- known competitors, you have something very special in people's minds. The same thing happened when the credit card appeared. American Express initially entered the credit card market because it thought their traveler's check business would be destroyed.
They believed that it would be a substitute, and so they were forced to enter this niche. It was a defensive maneuver. This happened because a guy named Ralph Schneider, Al Bloomingdale, and a few other people came up with the idea for Diners Club . The Diners Club idea spread rapidly: first in New York, and in the mid-1950s throughout the country.
American Express was very worried because they thought that if people started using these cards—and at that time, no one had heard of them—they would replace traveler's checks with them. So they got into the traveler's check business. That is, they entered the credit card business. Right away, despite the head start that Diners Club had, as they already had agreements with restaurants and had wealthy customers carrying their cards.
No one had an American Express card. But American Express entered the market and started charging more for the card than Diners Club. And they continued to take market share. This is a great position in people's minds when, when choosing, they are ready to give preference to a newer product at a higher price, abandoning the usual one.
And that just proved the power of American Express. American Express had a special prestige. You stood out with something special when you got an American Express card, unlike Diners Club or Carte Blanche, which was the third main competitor at the time. Visa didn't exist then. And you could see how this dominance was taking hold.
It showed what was on people's minds. That's why I bought their stock in 1964. We bought 5% of the company, which was a huge investment for us at the time, as I was only managing $20 million. But it was clear that this share in the minds of consumers had not been lost. Ahem. Over a significant period of time, American Express began to engage in other types of business.
They acquired Fireman's Fund Insurance—it was a very big acquisition. And to some extent, they have allowed companies like Visa to gain a foothold in the market. They still retained this exceptional prestige, but it began to fade. However, I would say that Harvey Golub, along with many other executives, has done an exceptionally good job of confirming and reinforcing this prestige.
About $300 billion in transactions will likely pass through American Express this year. $300 billion is a big number even for today's world . The average commission is about 2.73% . If you look at the average Visa or MasterCard commission, it will be about a whole percentage point lower. So you have a percentage point of $300 billion, which is $3 billion in revenue that your competitor doesn't have.
You can do a lot of useful things for your clientele. And they segmented the card, as you know. They even recently released this black card that costs $1,000. And it has a special prestige. I wouldn't say it's inevitable, but if the American Express brand was properly looked after... I'm sorry. It has immense value and will likely only get stronger over the years.
But I think what they went through showed that a company can withstand serious blows and bounce back, but it's hardly worth testing it endlessly. By the way, this is one of those things we pay attention to in business: if a company faces great difficulties but continues to perform well, it indicates its internal strength.
A classic example for me is AOL. Four or five years ago, I'm not an expert on this, but I got the impression that during a certain period when they were having a lot of problems, a significant percentage of AOL's customers were angry with them . But the number of customers grew every month. And it's a terrific business.
If you have a business where customers are mad at you and you continue to grow , it means you have passed some kind of test of usefulness. It could be argued that American Express has gone through this to some extent as well. Although everything wasn't that bad. But they had a lot of dissatisfied merchants and so on .
So sometimes it serves as an interesting test of the strength of a business. Coca-Cola had some problems in Europe, but came back stronger than ever. Sure, they had problems with New Coke, but they came back stronger than ever. So you really see this inner strength. And this is very impressive as a way of assessing the depth and impenetrability of the "moat" that we talked about earlier.
Charlie? Well, I think it would be easier to screw up American Express than Coke or Gillette. But this is an extremely strong business. And, uh, it's great that we have him. And we own about 11% of American Express. So when the payments amount to 300 billion, we get 33 billion in Berkshire's account, and that's growing at a pretty rapid pace.
The company grew significantly in both cardholder numbers and payment volume in the first quarter, and I believe our 11% will only become more valuable over time. It's hard to imagine anything that could destroy it. This is a very interesting business. They made an agreement to use American Express cards at Costco.
I think this was a very smart decision on the part of American Express. And it's a very ambitious company that does a lot of interesting things. Charlie is the CEO of Costco, so he...Costco is an absolutely incredible organization. We should have owned a significant portion of Costco for years, but I made a mistake.
Charlie was all for it, but I screwed it up . And then Now look at this table. In terms of the number of active cards and total transaction volume, American Express lags significantly behind Visa and MasterCard. However, when it comes to revenue, Amex generates almost twice as much as Visa and more than twice as much as MasterCard, according to our table.
So, how is this possible? The answer lies in Amex's unique business model—a premium closed network built around high- spending customers. But this strategy didn't emerge overnight. It has its roots in the history of Amex. Back in 1891, American Express introduced traveler's checks. Clients paid a commission for their purchase, but there was another advantage—“ float” (temporary use of funds ).
Travelers often purchased these checks weeks or even months before using them. During this period, American Express could hold or invest the funds, earning income before the checks were presented for payment . By 1958, annual sales of traveler's checks had reached an incredible $1.6 billion. However, credit cards, electronic payments, and global banking networks have evolved.
Traveler's checks gradually lost their relevance. Amex had to adapt to a completely different payment landscape . And this is where its modern business model becomes interesting. Unlike Visa and MasterCard, which primarily operate a payment network connecting banks, American Express combines the payment network with card issuance.
In its traditional closed model, Amex can manage both sides of transactions : the cardholder and the merchant. This provides Amex with closer relationships with customers and merchants, allowing it to generate revenue from a variety of sources, including card fees, merchant fees, and lending. Importantly, Amex is purposefully focusing on affluent customers, frequent travelers, and corporate businesses who tend to spend more.
Premium rewards, travel benefits, airport lounge access, and exclusive services help attract and retain these customers. Meanwhile, merchants can agree to higher service fees because Amex cardholders bring significant profits to their business. These customers spend more, and these spends make the network more valuable to retailers.
And therein lies the deeper lesson. American Express's success is not based solely on a strong brand or the company's long history. It has evolved from traveler's checks to a premium global payments business, adapting to changes in technology and customer preferences . This is what makes Amex such an interesting object to study in business.
The company didn't just survive the transition from one payment era to another. She found a way to stay relevant while flawlessly serving a valuable market niche.
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