Talking Grape Fruits, Thinking Grisham

Gift Cards Break Boundaries and Emerge as the New Consumer Currency of Choice

This summer, when the sweltering (remember?) sun drives you into Key Food for a sixpack, stop by the CoinStar on your way out, pop in your pennies and watch the new Harry Potter pop out. The little green machine recently announced that consumers will soon be able to receive gift cards in exchange for their change, including gift cards to bookstores.

Not since Barbie has such a small piece of plastic caused such a large amount of hoopla. According to the National Retail Federation, gift card sales reached $55 billion last year, with $17.3 billion being spent in the holiday season alone. Nearly 75% of all shoppers bought at least one gift card during the holidays, and the average gift card buyer bought 3.2, up 20% from the year before. What’s more, by the end of last year, over 80% of all American adults had received at least one gift card, with 90% of them classifying their gift card experience as “very positive.”

But while gift cards are rapidly emerging as the pre-payment option of choice, accounting is struggling to keep up – trying to figure out what they are and where to record them. As it stands, until the cards are redeemed, retailers record gift card sales as liability, and not revenue. Since gift cards sold during November and December are usually cashed in during January, accounting is helping to bolster an otherwise sluggish month for retailers. But card recovery is never complete, and by the end of January of this year only 61% of gift cards sold during the 2004 holiday season had been used, leaving an estimated $9 billion floating on unused cards. The cards, on average, have a non redemption rating of 16%, according to a Nielsen Report, which many (mistakenly) assume to mean an extra cushion for retailers. Unlike the UK, where gift cards were born (see below), unspent amounts remain a liability, and are therefore subject to escheat laws that allow states to claim that liability as “unclaimed property” for themselves. As a result, retailers are focusing on getting customers to redeem the card, even as they extend unlimited expiration dates. When they finally do, it often takes two store visits, and consumers overspend the card’s face value by 40%.

Independents Get Creative

In the world of gift cards, “booksellers have been as successful if not more so in terms of merchandising,” said Daniel Horne, retail and marketing professor at Providence College, commonly referred to as the “Gift Card Guru” for his continued involvement in the field. Although, mega-retailers Barnes & Noble and Borders come immediately to mind at the mention of gift cards, it is actually the little guy who is doing the most innovation as of late.

Established in October 2003, the American Booksellers Association‘s Book Sense gift card program — which now has more than 300 stores participating in the program and saw sales increase by 256% last December over December 2003 – is emerging as a front runner in developing new ways to sell, market and promote gift cards, including innovative display ideas, flashy packaging, and publisher promotional deals. Working with publishers was “something we always had in mind,” Jill Perlstein, Director of Marketing at ABA, said. “We try to work with the publisher to find something that’s going to benefit everybody.” In the first of such deals, Book Sense created a gift card that displayed a William Faulkner quote (as well as Vintage‘s logo) in honor of their 25th anniversary. Earlier this year, another more complex campaign involved a promotion from Hyperion in which gift cards emblazoned with the title and jacket art of its new book, Cecelia Ahern‘s PS, I Love You were given free of charge to the ABA for distribution in their member stores before Valentine’s Day. The ABA then handed them out, but left the stores to decide what they wanted to do with them. Harry W. SchwartzBookshops, in Wisconsin, elaborated on the Hyperion promotion by loading $3 onto the PS, I Love You card and offering it as a gift to customers who purchased the title, as well as those who purchased other Cecelia Ahern books.

“We’re always talking to everybody,” Perlstein said. “Basically we throw the deal out to everybody and see who’s interested.” Other promotion deals include one with Random House, which is issuing a display to each store, and “Greetings from Mitford” cards which feature pictures from Jan Karon‘s books Shepherds Abiding and Mitford Cookbook and Kitchen Reader (Viking/Penguin). Large chains such as Barnes & Noble and Borders also have a variety of both licensed character gift cards (such as the B&N Eloise card) and single title deals (such as the Border’s Polar Express card). Although Book Sense cards are currently only dealing with specific promotions, like the recent Hyperion deal, Perlstein says that she thinks the ABA will soon be branching out, “working with publishers to come up with cards that are occasion specific rather than a specific title so that they can have more shelf life.” And the gift card push isn’t confined to in-store activity alone. “Booksellers are using them as a way to get their name out,” said Perlstein, citing an anecdote about an ABA member who handed out gift cards loaded with $5 on them at a Chamber of Commerce meeting, rather than business cards. “It gets the people into the stores, and they’re almost always going to spend more than what’s on the card.”

From Milliners to Mega Stores

Gift Card Guru Horne places the inception of the gift certificate (paper sister to the gift card) around the beginning of the last century, when it was used by milliners like Stetson. The first comprehensive and sweeping national certificate campaign began in 1932 with the Booksellers Association‘s development of book tokens in the UK. The tokens, stamps in actuality, were affixed to a paper card at purchase, and could be redeemed indefinitely by the holder in a variety of different BA stores throughout the UK and Ireland. The national multi-vendor voucher program (which made the switch from stamps to paper certificates in 1997) is still in place today, often running alongside its more successful, modern equivalent: the plastic, stored-value gift card booming at international retailers such as Borders.

Although surpassed in sales, book tokens retain an important place in the voucher community, representing open-system cards that are redeemable with a variety of vendors. Stuart Matthews, Managing Director of Book Tokens Ltd., explained that when a book token is sold, the bookshop pays 87.5% of the token’s face value to the National Book Tokens (NBT) where a “liability” is created in order to cover the cost expended by the exchanging store. The remaining 12.5% is considered a “sales commission” of sorts that goes to both the original bookseller for driving the sale, and to the NBT for making the transaction.

In an interesting turn of events, Sainsbury‘s (the UK chain that now sells books in about 350 of its 721 stores) recently became the first supermarket to join the Booksellers Association. Sainsbury’s hasn’t begun selling book tokens to date, but Publishing News notes that if book tokens are eventually sold at Sainsbury’s, “it will be a considerable boost for all bookshops, since the vast majority of book tokens bought in Tesco or Sainsbury’s are unlikely to be redeemed in supermarkets.” Matthews agreed adding, “If they did agree to sell, then I would be very pleased, for they would, in my view, start selling NBTs to persons who might not normally visit bookshops, thereby expanding the number of NBTs in circulation” – an interesting multi-vendor structure in which Sainsbury’s would receive, in essence, a commission for driving consumers into traditional bookstores.

Although supermarkets in the US are yet to be granted access into the ABA (and no one is holding their breath), they similarly act as shopping shepherds by selling the gift cards of a variety of vendors, including bookstores. Last fall, Barnes & Noble signed with Safeway, allowing their gift cards to be sold in stores such as A&P, Stop & Shop, Lowes, and Price Chopper among others, as well as in CVS, Eckerd Drugs and Radio Shack.

With a torrent of cross-marketing channels emerging, the opportunities for multi-venue gift card deals seem endless.

Surveys show that consumers are spending more while shopping at fewer stores, and with shoppers now seeking out gift cards as first-choice gifts rather than as last-minute fillers, consumers are going to places like CVS for the express purpose of buying gift cards to stores like Barnes & Noble. And although most of the cards being sold in multi-venue locations are big-name retailers such as Barnes & Noble, Blockbuster and Home Depot, others, such as Virgin and Napster music download gift cards, are starting to break into the scene as well. To give gift card recipients even further choice, Safeway stores also offer the “My Choice Card” which is exchangeable for any of the cards that Safeway carries.

Selling gift cards in kiosks and check-out aisles won’t be the end of it, either. “I wouldn’t be surprised to see boxes of Apple Jacks having a Barnes & Noble gift card in them,” Horne remarked.

Good Job. Have a Gift Card.

“People will continue to come up with innovations as to how to merchandise [gift cards],” Horne said. “B2B sales, reward and recognition programs, [for example] Borders will partner with an incentive company – say a UPS driver doesn’t get in an accident for 100,000 miles, maybe he gets a gift card for a $100.”

Indeed, in a study commissioned by ValueLink last year, it was found that 40% of the 460 corporate incentive program decision makers interviewed said that they used gift certificates as incentive items in the last year, second only to cash. Companies can either use their own cards (e.g. Barnes & Noble giving an employee a Barnes & Noble card), or others (Sephora giving their company a Borders card). And whereas cash incentives have to be reported, gift card sales do not (necessarily), which makes incentives difficult to track, although it is estimated that the incentive industry pulls in about $30 billion a year.

Numerous B2B incentive programs have cropped up as advertising schemes and marketing deals as well, with Penguin recently offering a $250 salon-of-your-choice gift card to the winner of a contest revolving around their new book So Super Starry by Rose Wilkins. Schools also use gift cards as incentives, as well as for fundraising and charity opportunities. The Scrips program, for example, generates money for schools when they buy scrip (or negotiable gift cards) from retailers (such as Barnes & Noble and Borders) at a discounted price, and then resell the cards to students and parents at face value to raise the percentage difference. Scholastic Book Fair Gift Cards have cropped up to target kids whose parents cannot attend book fairs. And in higher education, many college stores (including both independents and Barnes & Noble affiliates) now offer gift cards as well.

Another phenomenon in plastic pre-payment, open-system cards, are co-branded credit cards like the Borders and Waldenbooks Platinum Visa card that uses a gift card as well as reward points in order to draw people into buying it. When purchased, the customer automatically receives a $20 gift card redeemable at Borders and Waldenbooks, and subsequent $5 store rewards certificates (exchangeable for merchandise in the same stores) for every 500 points collected – with double the points being received when the card is used in either Borders or Waldenbooks.

Now that gift cards are ubiquitous, retailers are looking for ways to encourage long-term gift card use in order to more thoroughly exploit direct marketing advantages of being able to track customer spending (such as where and when a specific title was purchased).

Some merchants offer reload incentives, such as increased stored-value, when customers refill their gift cards – (e.g. registering a $60 reload as $70), and advertising campaigns are now specifically aiming at gift card holders to drive up redemption rates.

“I think that they’ll continue to stretch these products out into all kinds of incentives. There’s still another good 10 years in it, and who knows what technology will bring next,” said Horne.

2 Trackbacks

  1. By 5 Tips to Win the Rebate Game | Money Talks News on November 15, 2010 at 12:46 am

    [...] come back to you as gift cards. Why? Because a lot of people don’t use those, either – some estimates are as high as 16 percent. If your rebate comes as a gift card, use it ASAP or sell it. We tell you [...]

  2. By 5 Tips to Win the Rebate Game « Credit Tips Today on November 18, 2010 at 8:43 am

    [...] rebates come back to you as gift cards. Why? Because a lot of people don’t use those, either – some estimates are as high as 16 percent. If your rebate comes as a gift card, use it ASAP or sell it. We tell you [...]

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