With consumer fears growing about everything these days, the financial crisis may affect the sale of gift cards this holiday season. The fear is that the possible bankruptcy of a retailer will significantly reduce the value of gift cards or even make them worthless.
Such a situation happened when Sharper Image Corp filed for bankruptcy in February. It initially stopped honoring its gift certificates and later liquidated its stores.
These consumer concerns are expected to rise as news of retail bankruptcies and struggles become more apparent. The list of bankruptcies so far this year include Linens 'n Things, Mervyns, Whitehall Jewelers, Boscov's, Barbeques Galore, Ms. Fields and Bennigan's. A brutal holiday season would put more retailers on the edge.
"I could see where gift card usage could drop 10 to 20 percent this year based on those feelings," Britt Beemer, chairman and founder of America's Group, told Reuters. "Consumers don't know which stores are in trouble, but when you start seeing Linens and other retailers closing stores it does give you pause to say, 'Who is next?'"
Consumers have little recourse should a retailer suspend its gift-card program. Under bankruptcy laws, retailers do not have to honor their gift cards once they file for Chapter 11 protection. Gift cardholders are considered unsecured creditors, who get reimbursed only after secured creditors and other priority creditors are paid in full. If anything, only a small portion of the claim is usually paid off.
"Consumers should consider the financial conditions of the retailers they hold the cards for," Stacy Janiak, vice chairman and U.S. retail leader for Deloitte, told Reuters. "It feels like cash in your wallet, but it isn't considered cash in bankruptcy courts. It can go to waste."
Last year, consumers bought $26.3 billion worth of gift cards over the holiday season, according to the National Retail Federation.
Discussion Questions: Do you see consumers' worries over possible retail bankruptcies affecting overall gift card sales this holiday season? Should retailers be doing anything to shore up confidence in the viability of their gift cards?