Gift Cards

AA047624.jpgJust about all retailers offer gift cards these days. They make shopping so much easier for people struggling to find the perfect gift. You can even get a $100,000 gift card from Four Season's if you're feeling particularly generous. (Let me know if you need my mailing address.) But gift cards have a dark side as well. Consumer Reports (the magazine) estimates that around 25% of gift cards purchased in 2007 have yet to be redeemed. That's a boon for retailers, but a bust for consumers.

With the down economy and over 6,000 announced store closings, you have to be extra vigilant. There's an email floating around that says the following:

I wanted to give everyone a heads up that if you tend to give gift cards around the holidays, you need to be careful that the cards will be honored after the holidays. Stores that are planning to close after Christmas are still selling the cards through the holidays even though the cards will be worthless January 1. There is no law preventing them from doing this. On the contrary, it is referred to as bankruptcy planning.

The email goes on to list retailers that are closing stores. While there is some truth to this email, its not a serious as one might think. Many retailers are closing particular stores, not closing shop. So if your local Gap closes, you might have to travel across town to spend your gift card.

When a retailer files for bankruptcy, things get a little more complicated. According to the California Department of Consumer Affairs, "a gift certificate or gift card sold by a seller that seeks bankruptcy protection may have no value. However, the holder of the certificate or card may have a claim against the bankruptcy estate." Retailers that file Chapter 11 (like Circuit City) are just re-organizing, so they usually continue to issue and redeem gift cards. However, if you're in possession of a gift card from a retailer that filed Chapter 7 (like Sharper Image), then you're a creditor just like any other and must "stand in line" to get paid, in which case you probably won't get full value.

The bigger issue for consumers isn't that a retail chain goes out of business. Its that consumers tend to not redeem the cards, leave residual value on the cards, or blow the cards on items they would not normally have purchased in the first place. Sometimes you just can't beat a check tucked in a sappy hallmark card.



The issue is even more complicated. FASB recently ruled that gift cards from retailers who maintain their own bank-like facilities (like Target, for example) are actually FDIC insured.

Also, an unredeemed gift card isn't really that much of a boon for the retailer. On the plus side, the retailer gets the cash, and can spend it right away. On the minus side, no revenue can be recognized...which means the retailer has to carry big new payables around on its books. And each state has differrent laws (escheatment laws) around when and if the money has to be either returned, posted as unclaimed cash...etc.

It's actually a pain in the neck...especially the unclaimed part. I don't think any retailer would tell you it is thrilled about the unredeemed portion. In the old days, gift certificates and their management was a real annoyance. While we now have technology to support the management of gift cards, the accounting requirements remain a real pain in the neck.


Posted by Paula Rosenblum on December 01, 2008 at 09:39 PM PST #

Good points, Paula. Escheatment laws are almost as bad as state sales tax laws. I think its funny that the courts have excused online retailers from collecting tax (unless they maintain a physical presence) because the state tax laws are so complicated. I hope that doesn't change, because I certainly use it to my advantage.

Posted by David on December 02, 2008 at 02:54 AM PST #

As a leader in the gift card industry, we at Blackhawk Network (largest third party distributor of gift cards and creator of Gift Card Mall) want to set the record straight. Gift cards will continue to be the preferred gift this holiday. In a recent study, we found that over 70% of respondents feel that gift cards are a useful gift since the recipient can get what he/she wants and 58% of consumers still plan on buying gift cards this season. Deloitte’s Holiday Survey also found for the fifth straight year that gift cards are expected to be the top gift purchase. Regardless of the state of the economy, they provide benefits such as convenience, personal budgeting and fraud protection when buying online. In addition, the reports of the vast amount of retailers not accepting gift cards has been completely overstated and not true. They want to keep their customers during this crucial financial time. Thanks.

Posted by Teri Llach, Group VP of Blackhawk Network on December 05, 2008 at 07:09 AM PST #

Teri, for sure gift cards remain popular and their use continues to grow. That could only happen if they offered value and convienence, which they certainly do. Consumers just need to avoid the few pitfalls. Enjoy the holidays!

Posted by David on December 06, 2008 at 07:44 AM PST #

Retailocity supports a new online retailing promotion that capitalizes on the convergence of two major trends – pre-paid gift cards and Internet auction sites. Consumers compete “at auction” for pre-paid gift cards. The retailer sets the minimum bid below face value their willing to accept. Customers compete to set the price their willing to pay above that minimum value.

At the start of each promotion, the retailer defines its auction. First, the retailer determines the total number of cards available for bid. Second, the retailer determines the minimum bid. Finally, they define the duration of the auction. For example, a retailer may choose to auction 5,000 cards with a face value of $100 with a minimum bid of $85 over a 5 day period. Retailocity facilitates the on-line auction process. At the close of the auction the top 5000 bidders will be winners. Let’s assume the top 5000 bid $92, the retailer just received $460,000 upfront.

Posted by Melissa on February 04, 2009 at 12:29 AM PST #

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