December 27, 2007
The Year of the Gift Card
By Tom Ryan
For many consumers, this holiday season’s most popular present was the gift card. The National Retail Federation predicted gift-card purchases totaled $26 billion in the U.S. this holiday season, up from $24.8 billion last year and $18.5 billion in 2005. The average consumer was expected to spend nearly $123 on gift cards, according to the NRF.
According to a survey by NPD Group, 61 percent of consumers planned to give the cards this year compared with 32 percent a year ago.
The gains come as retailers stepped up the marketing of gift cards this year, touting them as ideal for hard-to-please recipients and cheaper to mail than bulkier gifts. Numerous retailers, such as Starbucks and Costco, sell their own cards, and supermarket chains sell a variety of cards that fit the interests and demographics of their communities. Cards are organized by categories like fashion, travel, restaurants and books, movies and music.
“It has gotten to be so convenient. It’s the gift of choice,” Marshal Cohen, chief industry analyst for NPD, told the Seattle Post Intelligencer. “The art of gift-giving has changed. … (Gift cards) used to be something that was too impersonal.”
Also helping the trend are more attractive cards. Target and PetSmart sell cards with images that move, including “naughty and nice” meters and dogs making snow angels. Starbucks launched personalized gift cards with each depicting the favorite drink of the recipient.
For stores, not only are the cards easy to sell compared with items like clothing and jewelry but help reduce the number of returns. Consumers also typically spend more than the amount allotted on the card.
Cards also extend the holiday season. The International Council of Shopping Centers said that 29 percent of the cards will be used the week after Christmas and 64.5 percent during January. Because the card dollars aren’t counted as revenue until the cards are used, they enhance January’s bottom line as well.
But with increased popularity come increased complaints. The Consumers’ Association
of Canada claims up to 20 percent of gift cards are never used. Many contain
restrictions, including administrative fees and limits on cash back, and have
quick expiration dates. And many consumers still believe their convenience
doesn’t jive with the Christmas spirit.
“I hate it,” Becky Walters, from Boulder
City, NV., told The Arizona Republic while reluctantly buying gift cards
at a mall. “I’d rather be wrapping like a maniac.”
Discussion Questions: How do you think gift cards are changing the Holiday season? Given their growing popularity, how should retailers reevaluate their merchandising, promotional and inventory positions around the holiday season?
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It was interesting to observe the number of retailer ads for gift cards this year. Safeway, for example, offers a very wide selection of gift cards. One of their radio ads encouraged consumers to stop by and pick up a gift card for iTunes, thus saving consumers a trip to a crowded mall and encouraging sales in their supermarket instead.
The increasing number of personalized gift cards is an innovative alternative and very eye catching. Gift cards can make last minute shopping a breeze.
Gift cards are clearly a boon to retailers, although I’m skeptical of the research showing usage doubling in one year. They are a great source of cash flow, they clearly drive post-Christmas sales and they are part of the movement toward convenience-based shopping along with extended hours and website growth. And stores like Safeway who sell other retailers’ gift cards at their checkout lanes have made the category grow even faster.
However, one of this year’s “lessons learned” for apparel merchants is the lack of a key item, big idea or major trend to drive women’s clothing in particular. There are surely a lot of gift cards out there, but are customers going to find compelling content to spend their money on?
Gift cards not only solve the time crunch of shopping in several places to find the “right gift” but in our case–and I am sure many others–insure that relatives can get something they really want instead of adding a gift to the closet for “regifting” or going through the hassle of returns!
The benefit for retailers can come in the form of increased sales when cards are redeemed and the knowledge that the shoppers will be in store after Christmas. In terms of people who still want to wrap like “maniacs” and fight the lines at the Post Office, cards are only an option!
Gift card growth, although very healthy, is slowing down. To increase the growth rate, stores need to be more creative. For example, has anyone seen a store that accepts automatic gift card subscription orders placed up to a year in advance, for birthdays, holidays, etc? Has anyone seen lottery-style gift cards with surprise million dollar winners? Has anyone seen a winner (very popular) mall gift card?
It has been interesting to see major retailers such as Kohl’s and Target make gift cards the featured item in their television advertising this season. And yes, there are clearly a lot of silver linings (easier to sell) and opportunities to build new strategies (expanding the season/upselling) around the expanding popularity of gift cards.
However, I worry that gift cards will wind up being another factor that ultimately delays actual consumer purchases. I have seen first hand that gift cards can gather dust in a drawer somewhere if there isn’t a compelling product offering waiting on the shelf.
Beyond driving the initial sale of the card, the next step for retailers is going to require creating urgency to get the recipients in to redeem the card and hopefully spend a little more than the allotted amount. I will be interested to see if retailers build campaigns with messaging that offers incentives to come in and redeem your gift card, maybe offering a special coupon if they sign up for the store’s loyalty program or purchase special items.
Gift cards make enormous sense (and dollars!) for retailers in today’s consumer environment. Gift cards should be dealt in spades with today’s realities. A few examples:
1. Gift cards should be merchandised creatively and with plenty of fanfare inside retail stores.
2. All gift cards should be redeemable in-store but also online via the company’s web site.
3. Promotions for the post-holiday season should be created to encourage consumers to over-spend their gift cards for self indulgent and incremental sales.
There are a number of additional ways for retailers to embrace and take full advantage of gift cards for the holidays and more importantly, for post-holiday consumption. If approached imaginatively, the gift card season is a royal flush.
Gift cards are definitely here to stay, and they are a great opportunity for retailers. While it is true that the retailer is not able to include gift card sales in their revenue figures until a purchase is made, the fact is they still receive the cash up front. This is very beneficial to their cash flow in that it provides additional capital to fund additional inventory purchases.
Retailers should continue to build marketing programs around gift cards and their subsequent redemptions. January sales promotions could include an additional 10% discount on purchases made above and beyond the value of each gift card. This could ultimately drive additional traffic in January, and create a higher ring.
The other opportunity for retailers is to use the gift card as a customer information acquisition program. Retailers should allow consumers to “register” their cards after receiving them as gifts, to make certain that the value remains in place even if the card is lost or stolen. At the same time, the retailer would be gathering vital customer information on people who may have never shopped in their stores before. The technology is in place with most retailers, but they simply aren’t taking the extra steps needed to make the gift card program work smarter for them.
For one thing, retailers and analysts need to stop talking about comp store as if it were the only significant measure of success.
Gift card sales are not recorded as revenue until the gift card is redeemed. This does something wonderful for a retailer–it spreads the revenue into typically lackluster January and February. It flattens the seasonal spike that reporters are crawling over each other to report.
The fact is that Christmas retail sales were up about 2.5 points, which is an incredible result when you consider that gift card and Internet sales both enjoyed huge double digit increases. Both of these go unreported in the headline. It’s time to kill same store, or comp store sales, as the primary measure for retail success.
The gift card will revolutionize holiday gift buying. The majority of purchases will be within the 30 days after Christmas. Retailers will need to promote sales and products after Christmas to entice the gift card to be spent quickly instead of the traditional storage, cleaning and white sales in January.
As several of the previous commentators have noted, gift cards are for the time-starved and/or lazy consumer. They may also be for those who don’t really like the shopping experience, or at least shopping for gifts. This should be a warning to retailers that they better pay more attention to the in-store experience. Otherwise, what happens when shoppers tire of gift cards and stop giving gifts all together?
While I was waiting (for what seemed like an eternity) for family at the airport on Christmas eve, NPR presented a short on the significant increase in last-minute holiday shopping this year.
I wonder whether the convenience of the gift card (an easy way out!) combined with eleventh-hour seasonal discounting and pocketbook pressures has prompted the growth in the last-minute rush.
Gift cards are probably here to stay for casual business and corporate gifting but I think the luster is already starting to wear off them as a fad for friends and family. And that is just fine with me. While under-covered in the media, it’s nearly impossible to be in any group of people–family gatherings, neighborhood parties, work break rooms–without hearing countless mini-horror stories related to gift card redemption: Unexpectedly early expiration dates, temporarily misplaced cards, “blank” amounts discovered too late to do anything about it, cards not good outside of a geographic area, cards not redeemable online, wasted because the recipient wouldn’t be caught dead in the store the card is from, etc, etc, etc….
The group of teen friends in my close acquaintance made a pact this year that there would be NO Christmas gift cards. They view finding and wrapping the perfect special individual gift to be a treasured rite of friendship. They view giving gift cards as “lazy” and a cop-out.
If choosing a present for someone is impossible or impractical, then personally I prefer giving crisp money in a cash envelope. At least then the recipient can choose where and how to spend it in a way that will be the best possible “gift” for them; whether that’s at the mall, paying off a bill, stocking the pantry, or donating to a favorite charity.
It has taken me a while to warm up to gift cards, but I’ve finally gotten there. Seasonal selling spikes, while traditional, can ultimately create almost as many problems as they solve with their need for added payroll to receive merchandise, re-stock shelves, recover sales floors after big rushes and finally process returns. There are worse things than flattening that process out.
As for comparable store sales as the best measure of retailing success–it’s yet another thing I’ve learned to embrace. Our research keeps telling us that for the most part comparable store sales increases are the tip of the iceberg of a well run, intelligent organization–a retailer that does many things right. Of course there are some exceptions–where growth isn’t an option, and most of those companies seem to be “going private”–but overall, comparable store sales increases are a result of a set of behaviors and thought processes that create a winning formula.
For example (and this is just one)–we’ve got this challenge in front of us–gift cards sales are reducing GAAP sales in December. The creative retailer will find a way to lure those gift card recipients into stores in January, and goose sales and margin. So sales may shift by a month ONCE, but retail winners will find ways to creatively make their stores attractive in an otherwise dead period.
Have gift cards peaked? They won’t peak until shoppers are less time-starved. And while some may bemoan the cash float that retailers enjoy as a result of unredeemed gift cards, no one seems to be upset about all the frightening looking gifts that sit unworn or unused in recipients’ closets. Retailers get a nice boon from that as well. At least gift cards don’t take up as much space.
Gift cards have changed the retail paradigm and are here to stay. Retailers need to re-evaluate how they measure holiday sales. With the sale of gift cards up at least 32% (I heard 42% on TV), the holiday season may turn out to be a lot better than retailers and analysts think. Target said their sales were flat, but I would love to know how many gift cards they sold. It’s all in how the bookkeeping is done.
I was in Costco yesterday and saw a McCormick & Schmick’s “gift package” that contained not one but two $50.00 gift cards and a DVD of M&S restaurant recipes all packaged together–for $79.99!!!!! When more retailers get that creative, I think you’ll see gift card sales grow even more.
I was one of the people buying up the M&S gift cards at Costco–for ME!!! 20% off walking through the door of a restaurant is a great deal and was an incentive for me to buy about $500 worth for future purchases. (The free cookbooks with each gift pack was a bonus!)
There is no doubt in my mind that gift card purchases are on the rise. The evidence for me isn’t necessarily in reports that say people spent more, but in the after effects of the purchases. Specifically, I am looking at how many states have changed legislation to make gift cards more user friendly.
Oregon has just enacted legislation based on variations from other states where gift card balances don’t expire, they can’t be swallowed up by “inactivity fees,” etc. The need for the legislature to come in and keep them simple to use tells me that gift cards have increased in popularity.
Of course, cards having no restrictions do present an accounting challenge to companies who issue them, but a shrewd business will find a way to encourage people to use the GCs up quickly. Many have also gone to “bonus” for buying (buy a $25 GC at Red Robin, get $5 for you which can only be used between Jan 1 and Feb 28th) so what’s to say that retailers don’t start offering GC-only bonuses to come in after the holidays to get them used? I could see a store like Macy’s offer a coupon for an additional 10% if you come in this week and redeem your GC. They offer those types of incentives now if you use their credit card. That type of promotion could be offered in key times when a retailer would like to increase the cash flow by seeing GCs redeemed.
The great opportunity of gift cards is to capture those sales as full price/full margin sales rather than marked down/clearance sales. For those retailers who manage their inventories carefully and aren’t swamped by clearance markdowns, there will be room to bring in fresh, transitional goods at full markups, and the opportunity to capture gift card sales at full margins.