Western Union Company (WU)

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See all Bulls Reasons Bulls: Reasons To Buy Western Union's unmatched and growing network of agents 100% agree Western Union's unmatched and growing network of agents Western Union’s unmatched and growing network of agents (almost 3 times as many as MoneyGram’s) serves to keep Western Union as the key player globally. View or Edit Reason 1 votes 100% agree WU has huge moat and strong business model 0% agree WU has huge moat and strong business model WU has a large network and gives consumers access to international products -- a nice asset for U.S. businesses to use when expanding internationally, away from the U.S. Economy. View or Edit Reason 0 votes 0% agree Western Union's strong position as a market share leader with brand name recognition 0% agree Western Union's strong position as a market share leader with brand name recognition Western Union’s strong position as a market share leader with brand name recognition View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell WU makes cuts in business structure 0% agree WU makes cuts in business structure WU layed off 200 employees, including 60 at its headquarters, due to being in a "challenging economic environment." View or Edit Reason 0 votes 0% agree Competitive threat from Electronically-based payment methods 0% agree Competitive threat from Electronically-based payment methods The rising trend in Electronically-based payment methods could neutralize Western Union’s competitive advantages. View or Edit Reason 0 votes 0% agree Increased regulation of the money transfer industry 0% agree Increased regulation of the money transfer industry Increased regulation of the money transfer industry will cut into Western Union’s transaction volumes and ability to expand its agent network. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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The money transfer industry is susceptible to fluctuating economic conditions, and sluggish conditions in the U.S./Canadian and Mexican economies led to 10% and 4% declines in revenue, respectively, from those regions in 2007.^[5] On the flip side, revenue in China and India grew by 37% and 44% in 2007, respectively,^[6] showing the high growth potential of these emerging markets. Overall global remittances, or money sent within and between countries, doubled from 2002 to 2007,^[7] increasing the demand for Western Union's money transfer services. This higher demand for money transfers, however, has also increased competition for Western Union as other firms expand in order to capture part of the growing market, resulting in more price competition between firms in the industry.

[edit] Business Overview

[edit] Business Segments

Western Union operates in two main divisions: consumer-to-consumer and consumer-to-business.

• Consumer-to-Consumer (83% of 2007 revenue; 82% of 2007 net income) includes transactions between private individuals, regardless of geography. This segment has historically been Western Union's largest. The main customers for the consumer-to-consumer division are immigrants making remittances to relatives in their home countries. As more and more people relocate to other countries as a result of job opportunities, the international remittances industry has grown substantially in size, with an estimated $369 billion transferred across the world in 2007.^[8]

• Consumer-to-Business (15% of 2007 revenue; 17% of 2007 net income) lets consumers pay bills to businesses through physical, online, and over-the-phone money transfers.

2007 revenue and operating income by segment^[9]

[edit] Business and Financial Metrics

[edit] Geographic Distribution

In 2007, only 18% of Western Union's total revenue came from consumer-to-consumer transactions in North America (the U.S., Canada, and Mexico), down from 26% in 2007.^[11] During that same period of time, consumer-to-consumer revenue from international sources increased from 50% to 65% of total revenue.

2007 revenue by geography^[12]

[edit] Trends and Forces

[edit] Sluggish domestic economy = less money transferred out

In 2007, domestic (U.S. and Canada) consumer-to-consumer transactions fell by 4%, resulting in a 10% decline in revenue for the region.^[13] In the same year, consumer-to-consumer transactions in Mexico grew by just 4%, but revenue from the country actually fell 4%, reflecting lower average revenue per transaction.^[14] Though the percentage of Western Union's consumer-to-consumer revenue generated in these markets fell from 26% in 2002 to 18% in 2007,^[15] they are still very important to the company's business. As economic conditions in the U.S., Canada, and Mexico have weakened, the resulting drop in money transfers among these countries has taken a bite out of Western Union's revenue and net income.

[edit] Double-digit growth in India and China

Total global inbound remissions, 2002-2007^[16]

Despite signs of an economic slowdown in North America, Western Union's inbound transactions to India and China grew 75% and 25%, respectively, in 2007; this transaction growth led to revenue increases of 44% in India and 37% in China for the year.^[17] Even with such strong growth, these two countries still only accounted for 5% of total revenue for the year, leaving much room for further growth. According to the World Bank, all inbound remittances to India and China grew by 72%^[18] and 98%^[19] between 2002 and 2007, during which time all inbound remittances worldwide doubled.^[20]

[edit] Increased competition pushing down prices

The 2007 decreases in revenue in the domestic and Mexican markets are largely the result of price cuts. Though Western Union has the largest share of the international money transfer market and a larger footprint than any of its peers, growth among its competitors has increased competition in certain markets. In the Mexican-U.S. corridor, for example, the average remittance cost fell by 55% between 1999 and 2004 as more companies entered the market and forced existing players to compete on pricing.^[21] This is the case in many of the markets in which Western Union was previously the only company to offer money transfer services. While Western Union's size lets it lower prices to remain competitive in a given country or region, these price reductions do inevitably maintain market share at the expense of profit margins.

[edit] Competition

The money transfer industry is highly fragmented, with many small, regional companies forming most of the industry. The only two major players in the consumer-to-consumer market are Western Union and the much-smaller Moneygram International (MGI). Banks also compete with some of Western Union's services, but they often require customers to have accounts in order to transfer money. In the consumer-to-business industry, the market is even more highly fragmented, with the emergence of electronic payment systems like eBay's PayPal offering an Internet-based alternative to traditional money transfers.

[edit] References

1. ↑ Morningstar - WU research report
2. ↑ Euronet Confirms $1.65B Stock Acquisition Offer for MoneyGram - Seeking Alpha
3. ↑ WU Annual Report 2007, page 30
4. ↑ WU Annual Report 2007, page 3
5. ↑ WU Annual Report 2007, page 31
6. ↑ WU Annual Report 2007, page 31
7. ↑ Remittance Trends 2007 (Briefing 5) - World Bank
8. ↑ WU Annual Report 2007, page 3
9. ↑ WU Annual Report 2007, page 30
10. ↑ 3Q2008 Results - Western Union
11. ↑ WU Annual Report 2007, page 3
12. ↑ WU Annual Report 2007, page 3
13. ↑ WU 2007 10-K, Part II, Item 7, page 52
14. ↑ WU 2007 10-K, Part II, Item 7, page 52
15. ↑ WU Annual Report 2007, page 5
16. ↑ Remittance Trends 2007 (Briefing 5) - World Bank
17. ↑ WU 2007 10-K, Part II, Item 7, page 53
18. ↑ Migration and Remittances Factbook 2008 - India - World Bank
19. ↑ Migration and Remittances Factbook 2008 - China - World Bank
20. ↑ Remittance Trends 2007 (Briefing 5) - World Bank
21. ↑ Hispanic PR Wire - New Study Reveals Challenges in Money Transfer Industry
22. ↑ WU – Google Finance
23. ↑ MGI – Google Finance
24. ↑ WU – Google Finance
25. ↑ MGI – Google Finance
26. ↑ About Us: Agents – Western Union
27. ↑ MoneyGram International Corporate Home