 Gift
Cards
changing the face
of the holiday season
What’s going to be the hot gift item this holiday
season?
It’s not a gotta-have-it gadget or a high-demand
toy. The gift of choice is an electronic gift card—a “plastic
gift certificate” with the dollar value stored on its magnetic strip.
Gift certificates were once considered “the lazy
man’s gift,” an impersonal alternative to gift buying. But by
modernizing and improving on paper gift certificates, gift cards have
turned around the reputation of this form of gift giving.
By one estimate, gift cards are now the most popular gift
among young people, and they have garnered exclusive space in most large
retail stores.
Touted as a hot trend for several years among national
mass merchandisers and department stores, the gift card is now becoming
more common at small and midsize retailers, who see their many benefits.
The trend is being driven as much by consumer demand as by marketing pushes,
say analysts of the latest data on gift card sales.
Financial consulting firm TowerGroup found that gift card
dollar volume grew 50 percent from 2002 to 2003—totaling close to
$45 billion in sales in 2003—and estimated sales of $53 billion for
2004. Verifone research showed gift card sales for 2004 already at about
$63 billion, compared to about $12 billion for paper gift certificates.
Annual increases in gift card sales of 20 to 25 percent
are expected to last at least another four years.
Here in Michigan
A number of MRA members began gift card programs in the
past year. Many started the program shortly before the holiday season
and, for the first year, treated them as “a cleaner, more updated
version of the gift certificate” as Sharon Pugh described them. Pugh
is owner of Sideways, a gift and home decor in Plymouth.
Michigan retailers who use gift cards cite two primary
advantages: customers like them and they are easier to track, especially
at stores with multiple locations. Other advantages include the lower
risk of fraud compared to gift certificates and the ability to issue store
returns and credits to a card rather than paying out cash.
Several retailers who started the program in the past
year plan to do more to market the product this year, including making
them visible at the point of sale and training sales staff to promote
gift cards to customers who struggle with choosing the right gift.
Retailers understand the importance of prominently displaying
the cards, which have no value until activated upon purchase.
“Until now they’ve been behind the counter like
our old gift certificates. This season, however, we want to have an attractive
display rack for them at the register,” said Mark Schrag, of Seasons
in Okemos, who serves on MRA’s board of directors.
“We plan to put a display in each jewelry case—a
gift card presented in an attractive gift box, to plant the idea in shopper’s
minds and allow them to picture giving a card for jewelry,” said
Orin Mazzoni, owner of Orin Jewelers in Garden City and member of the
Michigan Jewelers Association board.
Kerry Glaesmer, of Votruba Leather in Traverse City, said
gift cards sold well on Mother’s Day and as graduation gifts.
“We promoted them as graduation gifts for high school
students going on to college, which brings the new customer back in August
or September for back-to-school items,” said Glaesmer.
Pugh knows the value of presentation when selling gift
cards.
“I punch a hole through the card—avoiding the
magnetic stripe of course—and tie on a chiffon ribbon, just to make
it a little unique and special. Customers can hang them on a Christmas
tree as an ornament gift if they like,” said Pugh.
“I also encourage and remind my staff to sell them.
They ask customers ‘Are you finding what you need?’ If the answer
is no or not sure, it may be a lead into a gift card sale,” Pugh
added.
Pugh also uses them as a quick and easy way to donate
when someone comes in to raise funds.
“I immediately respond positively to the plea, which
is good for community relations, and I don’t have to spend much time
or thought on it. When the organization raffles off my gift card or gives
it as a prize, I may find a new customer,” said Pugh.
Bob Clarke, vice president of marketing at CPI Card Group
in Denver, has advice for smaller retailers with new gift card programs.
“Retailers that are marketing gift cards aggressively—as
opposed to just offering them to keep up with the trend or to replace
their gift certificates—are doing best,” said Clarke.
“POS displays are very important,” said Clarke.
“The beauty is that they don’t take up much space and you can
generate hundred of dollars a day from the same spot you sell 50-cent
packs of gum.”
The biggest mistake a retailer can make with merchandising
a gift card program, advises Clarke, is to offer the cards exclusively
at the customer service desk. “If they’re not out where the
customer can see them, think about them, pick them up, don’t expect
to be wildly successful with their sales.”
 John
Mayleben, vice president of sales and marketing at MRA and manager of
its gift card program, says there is still time to join MRA’s gift
card program for the upcoming holiday season.
“If you’re interested in gift cards for this
season, we can help you,” Mayleben said. Call MRA at 800-366-3699
for more information.
Move over, stores
The whole retail industry will feel the impact of gift
cards this holiday season. Their mere presence has made holiday competition
fiercer by making it easier to give non-traditional gifts.
Restaurants, entertainment venues and service providers
like salons now offer gift cards and promote them heavily for the holidays.
Adventurous consumers may choose to give a dinner, massage or round of
golf instead of more traditional gifts.
For the 2003 holiday season, 36 percent of consumers who
received gift cards reported having received at least one for a restaurant
and 9 percent received at least one for a service. These numbers are expected
to climb each year as well.
The new math
Strong gift card sales during the holiday season also
affect the industry by shifting sales to the following year, what analysts
refer to as the January shift. Here’s why.
Many retailers do not count a gift card as a sale—instead,
they wait until the gift card is redeemed and merchandise is exchanged.
As a result, some of the $17 billion spent on gift cards in Q4 of 2003
did not show up in “holiday” sales, but instead as sales in
January or February 2004.
Consumers don’t care, of course, but accountants
and retail analysts do, since the January shift can put a damper on critical
year-end comparisons and boost sales in the new year.
ShopperTrak’s National Retail Sales Estimate reported
that for the week ending January 3, 2004, year-over-year sales jumped
by a dramatic 46.5 percent, presumably on the strength of gift card redemptions.
For January as a whole, U.S. retail sales in 2004 jumped by an outstanding
17.2 percent over the same month in 2003—the largest monthly year-over-year
growth since the U.S. Commerce Department began tracking the statistic
in 1992.
Deborah Weinswig, senior retail analyst with Smith Barney,
estimated that about 10 percent of gift card values were redeemed in the
week after Christmas, with 70 percent being redeemed by the end of January
2004, according to her analysis of the 2003 holiday season.
The January shift, however, provides potential opportunities,
according to Joan Storms, an analyst with Wedbush Morgan.
“What if you could use this shift to train customers
to be less promotional in buying after Christmas? If you know they’re
going to spend anyway, you don’t have to mark down as much,”
Storms said.
Smaller retailers who count the gift card sale when it’s
purchased rather than redeemed need not worry about the January shift.
And all retailers have the added benefit of float time.
“The sale of a gift card is essentially a short-term
loan to the retailer—you’ve got the cash and the merchandise
until that card is redeemed,” said Mayleben.
When redeeming gift cards, 56 percent of consumers spend
more than the initial value. At the same time, an estimated 15 percent
of gift cards are never fully redeemed and 5 percent are never redeemed
at all.
“Shoppers who leave a small balance on the card (no
cash refunds are necessary) may never bother to use it,” added Mayleben.
“Or they may return to the store on a separate occasion to use the
small balance. But again, that’s a store visit that may not have
happened otherwise, and they tend to spend more than the balance.”
Fee fi fo fum
Another trend in gift card programs: fees and expiration
dates associated with gift card use are going away.
To reduce the accounting headaches that result from unused
balances on gift cards, some retailers use expiration dates or charge
“dormancy” or “inactivity” fees—a small monthly
fee deducted from the card’s value if the card is not used within
some time frame, usually one or two years. Eventually the card is worth
nothing and can be cleared from the books.
Heavy media coverage last year, however, led consumers
to be wary of gift card fees and restrictions, which they view as unfair.
Even when retailers inform the shopper of such fees, that information
may not get passed on to the person receiving the card as a gift.
Moreover, states are passing laws that ban fees and expiration
dates on gift cards. California and Massachusetts have already passed
such laws, and Michigan may pass similar legislation this year.
In response, many large retailers have dropped these inactivity
fees and expiration dates. Wal-Mart, Target, Sears and JC Penny have all
dropped their fees and/or stopped issuing expiration dates on cards.
Small and mid-sized retailers who use expiration dates
or inactivity fees may feel increased pressure to change their policies.
Gazing into the crystal ball
What does the future hold for merchant-issued gift cards?
Gift card solution providers and most industry analysts predict growth
of 20 percent annually for the next four to six years. TowerGroup predicts
US gift card sales to total $90 billion by 2007. Other trends:
•Sales outside the store
Kiosks that dispense gift cards for many stores are beginning to show
up in malls. In other states, giant grocery chains carry gift cards for
20 to 30 retailers, such as Florida-based Publix Super Market, which will
sell gift cards from Toys ‘R’ Us, Blockbuster Video, Nordstrom,
Marriott Hotels and restaurant chains.
• More B2B uses
Creative retailers are marketing their gift cards as corporate gifts,
or using partnerships to get gift cards out there. Jay’s Furniture
Barn in Elwell partners with local realtors, who give Jay’s gift
cards to new homeowners, driving business to his store. Home Depot and
Lending Tree have a similar arrangement.
• Increased competition from bank-issued gift
cards
Visa, MasterCard, Discover and American Express all offer gift card products,
issued through banks, and are sure to market them heavily this holiday
season (see chart, above). Factors weighing against this type of card
are the fees associated with them and the perception that they are much
less personal than a merchant-specific card.
• More online sales and redemption
As e-commerce continues to grow, so will gift card transactions on the
Internet. Experienced gift card buyers will order them on the web, to
be shipped with a gift card to their out-of-town friend or relative. Large,
multi-channel retailers allow their gift cards to be redeemed in-store
or online; others are likely to follow suit.
• “Regifting”
In the past, people who hated the fruitcake from Aunt Sally might “regift”
it. As if gift cards didn’t offer enough choice, several websites
have sprung up to allow shoppers to swap or sell unwanted gift cards.
If enough unwanted cards are resold, the number of cards never redeemed
may drop. However, this affects national retailers much more than small-to-midsize
retailers.
This article was written by Amy Buttery,
Michigan Retailer staff writer.
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