By Paula Rosenblum, Managing Partner
10/20/2007
Last week, Brian wrote a very thoughtful piece on gift cards. It got me thinking about gift cards because we’re entering the heat of the holiday season starting this Friday.
Let me start by saying I am looking for input. Don’t be alarmed, I’m not asking you to take a survey. I’d just really like your opinion in our blog, or via personal e-mail. Specifically, I’m looking for input about why retailers have embraced gift cards as they have. I understand why consumers love them. By some accounts, they’ve become the gift selection of choice for 50% of gift givers and recipients. Most of them never expire, and fees are relatively inconsequential, especially when weighed against the time that could be spent shopping selecting a specific gift or returning said gift when it turns out to be “not exactly” what the recipient had in mind. I get that part. They’re a boon, no question.
But I have a harder time understanding why retailers love them. I understand that customers typically spend more than the gift card amount, so retailers eventually get incremental revenue above and beyond the gift card face value. That’s the easy part. And technology advances have made it simple to redeem the card at any location. Technology has also made tracking the outstanding balance easy. Old fashioned gift certificates were a nightmare for retailers. Expiration dates on gift certificates were more about finding a way to get rid of untrackable payables than anything else.
But it starts to get really murky from there, especially in the holiday season.
Consumer Reports’ analysis (as presented by Ad Age Daily) is that retailers love them because only 75% are redeemed within one year and so the retailers get to keep free cash. The organization even took out a full page ad in the New York Times warning consumers that retailers got $8 billion in ‘easy money’ because of unredeemed gift cards. With all respect to CR, I think their analysis completely misses the point. This isn’t like rebates. When a consumer forgets to mail in a rebate, a retailer gains a bigger gross margin on a sale that has already happened. But gift cards are a very different story, and they threaten to change retail dynamics around the holiday season dramatically. Here are things I know:
· A gift card isn’t a sale. It’s a payable until it’s redeemed. So if ½ of all holiday purchases are gift cards what will that do to retailer comparable store sales? If you buy a gift card for one store at another (say buying a Home Depot gift card at CVS, for example), CVS gets to take its portion of the revenue, but Home Depot does not. Will Wall Street accept a footnote that says “comparable store sales declined in December by 30%, but were offset by gift card purchases?”
· The gift card holiday phenomenon creates another skirmish in the war I call “Markdown Chicken.” Gift card recipients will be excited about redeeming their gift cards after the holiday. They’re likely thinking “January=markdowns, let’s redeem the gift cards then.” Retailers for their part are likely thinking, “Let’s do a reset: We’ll put out fresh merchandise and mix it in with the clearance items, and sell at a better margin than we would have.” Consumers will cherry-pick. Markdown Chicken is a war retailers never win.
· The gift card holiday phenomenon creates disruption and uncertainty around receipts, labor scheduling and closing the retail books. I actually received a call from a logistics publication writer last week asking if I thought the gift card phenomenon would change the flow of merchandise coming into ports during and after the holiday season. I replied that it wouldn’t, but gave it more thought later. It actually might. January has historically been a time when retailers tidied up the books for the year, did their final markdowns, performed year-end physical inventories, and based on results, finalized plans for the coming year. It’s a time of vacations and trade shows (the BIG Show happens in January). But what now? How do you do a store payroll plan when you’ve got millions of dollars worth of gift cards on the streets? Do the stores start to resemble a Fire Drill, with not enough employees to satisfy customer demand and do floor recovery after a rush? Do you hold the merchandise in distribution centers and risk even deeper markdowns when the consumer waits?
You get the point by now. I can’t understand why this is considered “a good thing.” Cash is nice, but predictability is even nicer. So, really… please tell me your thoughts. I’ve been around retail a very long time, and usually get the dynamics of the business. I’ve made some good calls over the years because I do understand retailing. But on this subject, I’m completely befuddled. Please visit our blog and provide some feedback. I promise to provide any “aha moments” that come from your responses over the coming weeks (and of course, I’ll have fun saying “I told you so” in February if it turns out I’ve got it right).
Thanks for your help.
Have a Happy Thanksgiving and a Grand Black Friday.
Paula
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