The Cards Will Predict Holiday Performance
By George Anderson
Retailers will find that their business fate this holiday season is all in the cards, not the Tarot variety, but gift cards.
According to Deloitte & Touche, gift cards will be the number one gift this holiday season, with 67 percent of consumers giving an average of 4.9 cards.
Pat Conroy, vice chairman and national managing principal for Deloitte’s Consumer Business industry practice indicated that retailers were stepping up marketing efforts for their gift cards while looking to make it easier for consumers to buy and redeem them.
“Look for retailers to offer innovative promotional campaigns for gift cards this year, because these cards have become such a favorite with shoppers,” he said. “Online redemptions, co-branding and personalization of cards are some of the features that successful retailers are initiating this year,” he added.
The growing use of gift cards has increased the importance of the post-holiday period when consumers begin to redeem them. Many, reports Deloitte, never redeem them. According to the firm’s Holiday Mood Survey, half of respondents have unredeemed cards and some have cards that have gone unredeemed for five or more years.
Another study, this one conducted by Stored Value Systems, finds that young consumers between the ages of 5 and 14 are often the recipients of gift cards and they are likely to redeem them and quickly.
According to the study’s findings, 80 percent of children have received gift cards from their parents or someone else. Seven in 10 who receive gift cards redeem them within a month.
Moderator’s Comment: How have gift cards changed retailing during the holidays? What strategies/tactics can retailers use to try and build demand for
their gift cards? –
George Anderson – Moderator
This phenomenon has been around for years, but is just now catching-on. Best Buy, Circuit City, Target and the large mass stores have recognized this as a cash cow, since they can record the cash asset now, and just keep the legal obligation on the books for a limited time. Redemption is markedly less than 100%, and this results in a bottom line which is better than almost everything else in the store, since you must include the store’s margins in addition to the lack of redemptions. Even fast food chains like Jack in the Box are now getting involved! The term “cash is king” has never been more appropriate when applied to these “cards”.
Demand for the cards is related to demand for the store itself. I would guess Wal-Mart is the leader when it comes to gift cards. To me, gift cards have dumbed-down Christmas. Not much thought or creativity goes into it. Still better than not getting anything.
Retailers who don’t offer gift cards are definitely missing significant sales and an opportunity for “prepaid cash flow”. Retailers who charge service fees after a period of inactivity are giving every card-selling retailer a bad name. The anger and backlash is growing. At least one State has moved to restrict the fees retailer can charge for inactivity.
Gift cards have definitely changed the holiday shopping mix. One thing they do is make it easier for non-shoppers to do their shopping – get a gift card for someone to their favorite store and, POOF, shopping is done. But, they tend to de-personalize the experience and the fact that so many go unredeemed for such long periods tells us that maybe we all have too much stuff. Gift cards might just be sending consumers a subtle message that they don’t need to shop so much.
Gift cards will continue to change the retail landscape by making the Dec. 26 – Jan. 15 period very critical. We should not be surprised when in a few years we see some retailers showing stronger retail sales for the period after Christmas than before. In the end, it will mean retailers with a typical year-end of Jan. 31 will need to manage their inventories even tighter and become even more adept at watching price points, etc.
First, to answer Mr. Bittner’s question: Gift cards sold for other retailers, for example by a supermarket, on commission. They may receive a flat rate or they may receive a percentage of the face value. From that rate, less a transaction fee, they make a profit. These sales outlets are becoming a large market of the total overall gift card sales. The retailer’s card is booked as a ‘receivable’. At the time of the actual sale (when the card is redeemed, all or in portion), the sale is booked.
As another writer mentions, there is a looming issue for retailers regarding gift cards. That is related to what is referred to in the industry as ‘dormancy.’ That is a period of time, designated by the selling retailer, of non-use. After that period of time, the retailer begins to ‘take’ all or part of that amount for a period of time until the value is depleted. This has become litigated and legislated in a couple of states now. In time, it’s likely to become a real issue as the retailers in multiple states set their own guidelines or legal requirements regarding dormancy. It will be a systems and bookkeeping nightmare and reduce the profitability of gift card sales, but it won’t slow the market for them on the consumer side. Dormancy rates can be as high as 7-10% of overall gift card sales. So, in fact, it really is a hidden profit margin for retailers. However, in anticipation of regulation, many retailers have backed off shorter dormancy periods and have extended them substantially. Still, in the end, after a period of non-use likely the same as today’s averages, cards that haven’t been used, won’t be. Just check the fine print on the back of the card next time you purchase. If you ask the sales clerk, they likely and conveniently won’t know. It’s not something that is ‘advertised.’
Sadly, as we become less and less a personal society, for many reasons, gift cards will continue to grow. We all know the excuses, however. I, for one, would rather receive a gift and even more so much more enjoy buying and giving a special gift. Alas, many will take the gift card route because it’s easier. Retailing is different and shopping is different. Sure seems like a lot less fun for the ‘giver’ and the recipient. Unless, of course, you’re a kid. Then, receiving a gift card from Target is a lot more exciting than receiving bunny ear pajamas from the long lost aunt.
Gift cards are the next logical step in turning what was once a significant holiday occasion for some people into a commercial obligation for many people. I hope that is sufficiently succinct – no need to elaborate.
In our store, we try to market gift cards as a gift AND as an addition to a gift (as part of a gift basket, inserted in a floral arrangement or attached to a larger present). We also offer a variety of packaging options so the card can be included in a gift bag with some hot chocolate or candy to enhance the gift experience. The beauty of gift cards is that they can be for any amount — we have had customers put $10 on them and use them as stocking stuffers as well as people who put hundreds of dollars on them and gave them with a gift idea. (For example, one lady bought a $350 gift card for her mother to come and buy all her bedding plants and gardening supplies in the spring.) I think a lot of consumers also feel like they are giving something more gifty than cash when they give a gift card. To me, a gift card to a favorite store does say that some thought went into the gift (more so than cash). Is it the same as opening a present on Christmas day? No. But it is a lot better than receiving dozens of nut trays.
Gift cards are a win-win situation for retailers as well as consumers. The gift card is the perfect fall-back and last minute convenient gift for the consumer. Retailers win because they create revenue by selling the specified amount loaded onto the card. I believe the most important gain is realized when the consumer spends over the amount on the card. The focus for retailers should be on how to get the consumer to use the card. Consumers are more likely to spend more when redeeming a gift card and the key for retailers is to capture this hidden value. How long will it take for all fast food companies to jump on the gift card train and cash in?
There are a couple of interesting accounting and margin management questions around gift cards that I really don’t understand, but I can imagine they have an impact on the bottom line.
First, if a retailer sells his own gift cards, then all that does is create a liability for future sales. It should not be recorded in current revenue but rather as a “pending sale” and a liability. When the merchandise sale is recorded, the liability gets reduced. But what happens if you sell another retailer’s gift card, as many supermarkets do?
The second aspect to all this is what effect gift cards have had on after holiday sales. Has there been a shift of sales from the pre-holiday period by customers using gift cards to take advantage of post-holiday markdowns?
Finally, I know there is a huge amount related to gift cards that never get completely used. For whatever reason, the holder never redeems the whole amount. Maybe this makes up for the increase in mark-downed purchases, but I wonder.