My concern is that the recent problems might be symptoms of the fact that it is running out of businesses that are a close market fit for its services.
Why did they target specialty retailers and not some other segment? I would argue it has to do with consumer behavior. Store cards benefit customers (invariably women) who shop frequently at their favorite stores which adds up to significant savings. The cards also benefit retailers who can target these same frequent shoppers to buy more vis targeted marketing.
ADS essentially followed a niche strategy that is based on serving specialty retailers. This is a market they served better than the Citigroup’s and Capital One’s of the world.
The retailers ADS targets have only a transactional relationship with their consumers and hence need ADS to help them with marketing. Online only and digital businesses have a relationship (via an online account) that makes ADS much less useful to them.
Businesses that are not retail are not a good market fit for ADS. They signed up Wyndham this year. I just cannot imagine how a hotel chain could be a good fit. It assumes that people would fly out to a distant city, make a hotel reservation by providing an existing credit card and then apply for the hotel card after they get there. It goes against the grain of how consumers behave. This applies equally well to Digital/eCommerce only businesses.
ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.
If you look at their growth strategy and management has laid this out pretty well. When they onboard a retailer, the 3-4% same store sales growth for the retailer, translates into a 3-4% growth for ADS as well. Now, they typically are starting from zero at the retailer, since the retailer does not have a store card in place. ADS would get this to say 10-20-30% of their customer base and this translated into another 3-4% growth. New retailers who they sign up then generated a further 5-6% growth on top.
The growth math above stops working at some point and the problems facing their end customers (retailers) could mean they are getting closer to that point.
The concern is around management ability to recognize when their business turned into a cash cow and allocate capital appropriately. Management believes they still have a long runaway to growth. So this could be an issue.
Anyway, ADS reminded me of a mistake I made a couple of years ago and the similarities are striking. So I decided to pass up unless I am able to address my concerns mentioned above.
Vinod
