Sure, you loved that pink fluffy kitten sweater from Aunt Bertha two Christmases ago, even if it was three sizes too small. And the year before, you adored the singing fish plaque. Yeah, right.
Chin up, friend. Chances are good you won’t be looking to regift Auntie’s presents in the future, thanks to the burgeoning popularity of gift cards and gift card “malls” — those racks offering cards from multiple retailers you’ve seen in locations like CVS.
For many — including befuddled gift givers who don’t have a clue what their friends or relatives might want to receive — the category has been a godsend. Consumers are expected to spend upwards of $90 billion this year on gift cards, up from $76 billion in 2006, forecasts Dan Horne, associate professor of marketing at Providence College in Rhode Island. And by 2008, the category is projected to surpass $100 billion.
The fact that a gift card can cater to every interest works for both buyers and recipients.
“It used to be gift cards were always the lazy-person way to give a gift,” says Bob Skiba, executive vice president, general manager for gift card provider Comdata (formerly Stored Value Solutions). One of the largest gift card providers with 650 clients, Comdata distributes cards in 150,000 retail locations.
“Gift cards have become accepted,” adds C. Britt Beemer, founder of America’s Research Group, a consumer behavior research and strategic marketing firm. “There is virtually no negativity around them anymore.”
In order to stand out in a sea of plastic at retail, marketers are using more imagination in their designs. Moveable parts, scented cards and audio chips are some of the gimmicks to recently hit store shelves.
“Retailers are looking for card products and card services that bring innovation to something which had become rather stale,” says David Brown, CEO of digital publishing company Serious USA, which markets interactive CD-ROM cards.
One way to stand out is to be useful. For example, Home Depot created a tape measure gift card around Father’s Day. The item not only looks the part, but has an actual tape measure and level. The design was a hit. The product is so popular that it’s often sold out.
“One of things we try to make a cornerstone in our strategy, whether it’s across the retail business or the B-to-B channel, is innovation,” says Manish Shrivastava, director of Home Depot Incentives Inc. “We are trying to get our brand in more places, in front of more people. It’s a way of going beyond the orange box to reach consumers and then, in turn, drive them in.”
Other retailers play off affinity. Target, for instance, last month launched a limited-edition card tied to the “Transformers” movie. The dual-purpose item assembles into one of the “robots in disguise,” complete with moving parts. Or, if the would-be recipient is in need of some relaxation, Target also offers a card packaged with aromatherapy bath salts. This is an example of adding value, Horne notes.
Merchant-specific gift cards are known as “closed loop,” and are good at only that retailer. In contrast, an “open loop” card can be redeemed at any retail location. They’re branded with the logo of a credit card company or financial institution.
Personalization is a tactic used at Dunkin’ Donuts to boost sales. Photos or personal messages can be printed on cards.
“Not only do they help distinguish Dunkin’ Donuts Rechargeable Cards from our competitors, but they also give consumers even more reason to keep the card in their wallets,” says David Tryder, Dunkin’ Brands manager of marketing services.
the Machinations of Redemption
To the buyer and recipient, gift cards are relatively transparent. The person on the receiving end figures out what he or she wants, brings the card to the cash register and that’s about it.
But for merchants and suppliers, herein lies a somewhat convoluted process that takes a while to show up on the books. Marketers can’t list gift cards as revenue until they are redeemed, thus resulting in money held in limbo for varying periods of time.
More than half of recipients redeem the cards within three weeks of receipt, while 85% do so within three months, according to InComm, a marketer and distributor of prepaid cards.
About 5% of all gift cards go unused in a 12-month period. Some gift cards marketers attach expiration dates or fees for non-usage beyond the one-year mark. But those penalties are a fading trend. Many marketers are doing away with the restrictions for fear of turning off consumers.
“It can give retailers a competitive edge to not have a time expiration,” says Mike Gatti, executive director of the Retail Advertising and Marketing Association, a division of the National Retail Federation. “It depends on the relationship with consumers and where the [brands] are competitively.”
For those that still implement expiration dates, such as closed system cards like American Express or Visa, “It can be used as marketing ploy to draw people in,” he adds.
Some recipients hang onto the cards waiting for a sale. For instance, 28% of people used their gift cards this Memorial Day weekend, compared to 18% in 2006 and 6% in 2005.
“People don’t use gift cards frivolously,” Beemer says, noting that five years ago the cards were treated as found money. Now, they’re perceived in the same vein as hard-earned cash.
Marketers largely measure their ROI in this area by incremental sales above the original gift card amount. In many cases it works. Consumers, on average, spend 20% to 40% more than the gift card amount, according to InComm. Indeed, about 51% of consumers who redeemed holiday gift cards said they spent additional money beyond the value of the card, according to an NRF survey conducted by BIGresearch.
Some marketers are getting crafty to lure consumers in to the store. Circuit City, for instance, is developing a drawing contest around its customizable kids’ gift card. The winning design will be printed on the card, and a portion of all gift card sales will be donated to charitable organizations. The promotion is expected to launch by the first quarter.
Gift cards “malls” are cropping up everywhere — from pharmacies and supermarkets to gas stations and convenience stores. These aren’t traditional malls, but rather a rack of dozens of gift cards from numerous different non-competitive brand retailers.
The number of cards on display depends on space. Smaller outlets may display five to 10 choices; larger stores could offer 30 to 40 cards. Four competitors dominate the gift card mall space: Comdata, Blackhawk Network, InComm and CoinStar.
“We’re seeing a steady increase,” says Kristi Turner, senior vice president, marketing, InComm. “We’re seeing many retailers commit to the category. Consumers tend to go there as a destination, rather than as a last-minute idea.”
Through gift card malls, Circuit City extends its reach to 14,000 locations beyond its 630-store footprint.
“We’d never be able to get that volume without these gift card malls,” says Circuit City’s Diane Linke, senior manager, gift card marketing and operation. “It’s a benefit for our brand outside the store walls.”
One unusual wrinkle is the varying percentage of commission that a retailer earns from a gift card sale. That amount depends on “how enticing a brand you are,” says Comdata’s Skiba.
CVS/Pharmacy, a gift card mall provider that offers cards in 5,400 of its stores, has positive results.
“Gift cards are a great seller for us,” CVS spokesperson Erin Pensa says. “The display units are accessible and make it easy to find what you are looking for.”
A gift card needn’t be an inanimate piece of plastic. In fact, it can contain video entertainment.
In May, Circuit City started selling a gift card produced by Serious USA, which tied into the theatrical release of “Pirates of the Caribbean: At World’s End.”
When put into an Internet-connected computer, the disc, which was actually a molded mini DVD disc, played clips from the movie and offered downloads and links to “Pirates” merchandise.
“Retailers are saying, ‘We want to sustain customers,’” Serious USA’s Brown says. “You can only do that if you bring them new and exciting things.”
Of course, when there’s interest in a hot technology, litigation over intellectual property may not be far behind. Last spring, Serious USA alerted two companies working together — EnXnet and MoxyCard International — of potential patent infringement.
EnXnet is developing a hockey rink-shaped multimedia gift card that it plans to launch during the holidays. The ThinDisc-based technology card works in both computers and DVD players, and contains video and audio clips, as well as Internet connectivity and special promotions. MoxyCard International will handle the marketing behind the card.
“We have advised them we are monitoring the marketplace,” says Katrine Levin, IP and general counsel for Serious USA. “Once the product hits the market, we will take appropriate action, if any.”
But EnXnet, a research and development firm, says it’s operating on an existing patent.
“I don’t know of any real problems there,” says EnXnet CEO Ryan Corley. “Our product is different. There’s nothing that’s keeping us from bringing it to the market.”
Packaging, like technology, can distinguish gift cards from the rest of the pack.
“A lot of retailers are looking to enhance packaging as a way to stand out so they don’t get lost in the sea of cards,” says Eric Child, president of Seastone, a specialty gift card package manufacturer.
Clothing retailer Stage Stores Inc. worked with Seastone last year to spice up its card offering with four holiday-themed designs and packaging. As a result, the apparel chain reported a double-digit increase in gift card sales, says Jennifer Grammar, gift card marketing manager, Stage Stores.
“Customers want a choice of what kind of card to buy,” Grammar says. Often the deciding factor is “anything that makes the card look special. The packaging is there to enhance the gift card sales. It makes a complete gift.”
“Gift cards are going into a whole new generation of development,” notes Structural Graphics CEO Michael T. Maguire, whose firm designs and manufactures interactive packaging and advertising materials.
As for the future, think digital. Mobile phones could become a preferred method of distribution. Rather than show a gift card, consumers could display a barcode on their cell phones to use as a gift certificate to redeem merchandise.
“The technology may change,” Horne says. “It’s a hard concept for consumers to get out of the blue… but that is coming.”
- Birthdays are the biggest gift card-giving occasion, followed by holidays.
- The average value of gift cards ranges from $38 to $40.
- Of gift card buyers, 22% bought them from a gift card mall last year, compared to 14% in 2005.
- During the holidays, consumers spent an average of $164.81 on gift cards, up from the $146.20 they planned to spend.
- For the holidays, department store gift cards were the most popular followed by restaurants, electronics stores and discount outlets.