A Jolly Plastic Season

As holiday sales of gift cards grow, retailers will pull out the stops to get consumers to redeem them before New Year's Day.

By Laura Kennedy, Researcher-Reporter, the Kiplinger letters

November 2, 2007

Gift cards will fly off store shelves this holiday season, with the total value of card purchases reaching just over $30 billion, a 15% gain from the same period last year. Prepaid debit and credit gift cards are a growing share of the pie. These products, offered by Visa, American Express and other card companies, are accepted at a number of stores rather than at a single chain.

Gift cards "are the safest thing for [gift givers] to buy," says Britt Beemer, the chairman of America's Research Group, a consumer behavior research company. "You can't make a buying mistake that way," he adds. Retailers like them, too, because consumers tend to spend more than the value of their cards once they're in the store.

Retailers will try to get consumers to spend the cards quickly. Expect stores to go to great lengths this year to encourage early redemptions. For example, a shop might add 10% more value to a card if it is used by Dec. 31. Other stores might guarantee another card of smaller value -- say, $5 or $10 -- when the consumer depletes the first one they have. Vendors will also heavily promote sales beginning the day after Christmas, and they'll try to rush out some spring clothing and other merchandise during that period to entice people into stores.

Accounting rules are largely behind the redemption race. Stores can't claim the revenue from the sale of a gift card until it is used. Consumers normally don't do so until early in the following year -- usually during sale periods in January and February -- which effectively shifts the card sale's impact forward. Retailers typically don't mind waiting, but not this year. Stores are expecting tepid growth in holiday sales, with an average gain of about 3%. If chains can get more cards redeemed during December, then their holiday performance will look healthier and Wall Street investors will be happier.

Gift cards will account for 7% of holiday gift spending this year, compared to around 4% in 2003. Look for vendors to offer innovative sales pitches, notably offers that combine cards with other merchandise. For example, Home Depot is marketing a card with a hole in the middle that allows it to double as a playable DVD containing short instructional videos on do-it-yourself projects. Other vendors are including discounts for related products or selling the cards along with chocolates and other small items. Gift givers appreciate the bonuses, since they give the present a more-personal feel. "The stigma on giving gift cards disappeared with all of the personalization and marketing features," says Leon Nicholas, a principle in consumer goods and retail for Global Insight, an economic consulting firm.

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