What Retailers Need to Know About Gift Cards
It’s called the season of giving. According to the numbers, it might more accurately be called the season of giving gift cards. It’s been almost two decades since the emergence of the pre-loaded plastic presents, and while sales peaked in the mid-2000s, CEB TowerGroup research shows that gift card sales still grew to $124 billion in 2014, a 5 percent increase over the previous year.
Despite their popularity, CardHub estimates that $44 billion in gift card value has gone unredeemed since 2008. It’s a confusing statistic for both retailers and consumers, as demand disagrees with actual spending. It’s also mutually ineffective: vendors don’t profit, and gift-givers’ money goes to waste.
So where does all that money go? And are gift cards still a good option for retailers and shoppers?
With the holiday season coming to a close, it’s time to shine a light on the “naughty and nice” features of gift card commerce and rethink buying and selling strategies.
Unused Card Funds Get Regifted to Uncle Sam
Approximately 6 percent to 10 percent of gift cards are sold but not redeemed. While consumers might assume that retailers can quickly pocket this profit, the opposite is true. Regulation passed in 2010 mandates that cards are valid for at least five years after issuance. Some states prohibit expiration entirely. That means that businesses are required to account for gift card dollars as potential — not actual — revenue, what's called “breakage.”
Breakage has befuddled business accounting for quite some time. 2016 will bring new accounting standards that normalize breakage reporting on financial statements. But the fact is, businesses don’t profit when cards go unused. When valid gift cards go unredeemed, funds float somewhere between the business and consumer, never decidedly landing in either’s pocket. But after expiration, the money finally finds a home.
After the five-year mark, the government gets a piece of the holiday gift card pie. States look to recover unused funds through what’s called escheatment: If an account has been inactive for a number of years (length varies by state) and the owner cannot be contacted (which is often the case with gift cards), then the abandoned funds become property of the state. You forfeit your gift from Aunt Judy to Uncle Sam.
To Prevent Fund Forfeit, Gift Cards Need Value Beyond Money
Although gift card purchases haven’t returned to their mid-2000s peak, they’ll likely remain a popular holiday wish list item. For recipients, they provide choice. For businesses, they provide new customer referrals and increased sales. Shoppers typically spend 38 percent over the face value of their card. So as a gift-giver or a business, how do you make sure they’re used?
One surefire strategy is to extend the value of a gift card beyond its loaded funds. Connecting gift cards to a loyalty program, for instance, can turn a one-time customer into a repeat buyer. Gift card buyers can seek out this feature, knowing their gift will more likely be used on a regular basis.
How retailers structure a loyalty program really requires digging into customer behaviors and brand identity. Recent research indicates that customers value points: Customers cite “earning points to redeem for extra savings” as one of the top four reasons they’re brand loyal.
Make Your List, Check Future Gift Card Strategies Twice
Despite the potential for unredeemed money, gift cards are still likely to be a popular holiday purchase. However, in the next couple of years they’ll likely see some significant changes. CEB predicts that the future holds more e-gifting practices for retail, entertainment and technology companies. Data from Clutch’s consumer management platform agrees: In the fourth quarter of 2014, customers preferred virtual cards two to one over physical cards, and virtual cards accounted for $7 of every $10 in gift cards sold. Furthermore, virtual cards were loaded with nearly double the amount of physical cards.
When it comes to physical cards, businesses and consumers alike should seek out options connected to loyalty programs. Not only does this decrease a card’s chance to get lost in the sock drawer, it provides a platform for more personalized interactions between brand and customer.
It’s up to businesses and consumers alike to prevent breakage and keep gift cards on the “nice” list. Retailers can beat business bah humbug by adding more than cash value to cards, and customers need to seek out these options to increase likelihood of redemption. It’s the best way to ensure gift cards live up to the wealth and prosperity promised with every holiday greeting.
Jerry Shinfeld is the vice president of finance for Clutch, a consumer management platform provider.
Related story: 7 Ways to Combat Gift Card Fraud