CAN A RETAILER GET FREE MONEY BY SELLING GIFT CARDS? THE ANSWER IS YES.
By Thomas P. Nguyen, V.P. of Sales for Transtar POS
Like most people, I have received many gift cards for Christmas and for my birthday. And, like most people, I have still many of those gift cards lying in a drawer at home. The value of the card has already been purchased and payment has been received by the retailer, and fortunately for the retailer, many of the cards have not been redeemed and probably never will be. This results in the retailer receiving “free money”. Scenarios like this very common and are one of the many reasons why more and more retailers are offering gift cards in order to increase their sales.
Gift card usage has increased dramatically during the past few years and retailers are finally realizing that offering gift cards can help increase their sales and improve productivity. In 2006, consumers bought $24.8 billion in gift cards, 34% more than in 2005. Gift card sales rose only 7% from 2004 to 2005, and 0.5% the year before. (USA Today, Mindy Fetterman, December 29, 2006).
There are many reasons why gift cards benefit retailers and increase sales and performance. First, gift cards are often never redeemed. Studies by Consumer Reports and the TowerGroup estimate that 10%-20% of purchased gift cards are never redeemed. A great example of gift cards increasing sales is Best Buy, who reportedly earned $16 million in 2006 for gift card “breakage”, which is the industry’s term for card value that was bought but never redeemed.
Second, there is “up-spending”, which is the industry term for describing when customers spend money to buy merchandise that is more expensive than the value of the card. According to studies such as the Purdue Retail Institute, consumers typically spend 20% more than the value of the gift card when they go shopping. (NY Times, “Gift Card Economy”, January 7, 2007).
Gift cards can be a great marketing tool since they usually contain the store logo and business information and can contain store promotions as well. Gift cards are convenient for customers and profitable for retailers because they can be purchased in any dollar amount and make great impulse buys since they are typically located at or near the register.
Retailers can go online to purchase gift cards, and there are usually local vendors who specialize in promotional materials who can create gift cards as well. In addition, many retailers have their POS provider create the gift cards and integrate it into the retailer’s POS system. Many POS providers, such as Transtar POS, now offer gift card production and integration as an additional service to their clients.