A Gift from Me to You: Cross-Channel Gift Cards

May 01, 2007 9:30 PM  By

Jenson USA, a multichannel merchant of mountain bikes, had its best year ever in 2006, and the trend is continuing. “We’re up 40% over last year,” says Mike Cachat, president of the Ontario, CA-based company. “We’re on fire, and I think it will continue.” A key driver of the sales increase? Gift cards and e-gift certificates.

By offering gift cards as incentives when customers buy a particular item or spend a certain dollar amount, Jenson USA was successful not only in generating the initial sale but also in luring customers back to spend their gift cards. What’s more, on their return visits to the merchant, they generally spent more than the amount on the card.

“It’s another tool at our disposal,” Cachat says. “It’s another way to touch a customer that we may not have been able to touch before.”

Cachat is among the growing ranks of merchants who have discovered that gift cards are about more than gifting. The cards are proving to be powerful marketing tools. “If a retailer doesn’t have a gift-card program in place today, they are really behind the eight ball,” says Karl Bjornson, senior manager at Atlanta-based retail consultancy Kurt Salmon Associates. “They should think seriously about putting one in.”

But implementing a gift-card program has ramifications you may not expect. With card recipients now choosing their own gifts after the gift-giving holiday has passed, Bjornson says, “the way the consumer is shopping has changed. And the way the retailer needs to respond has also changed.”

Money (that’s what I want)

For 2006, financial-services consultancy TowerGroup pegged gift-card volume at $80 billion; it expects the figure to exceed $100 billion in 2008. In a recent report, the Needham, MA-based company divides the overall gift-card category into $29 billion for retail cards; $18 billion for restaurants; $12 billion for miscellaneous, such as gas station, entertainment, and travel; and $23 billion for universally accepted, stored-value cards such as MasterCard and AmericanExpress.

Merchants generally do not count revenue from gift cards until the cards are redeemed, so it’s in their interest to encourage customers to use them as soon as possible. Yet after the 2006 holiday season, by the second week in January 2007, shoppers had spent less than half of the value of their gift cards, according to a BIGresearch study for the National Retail Federation. And experts say that about 10% of the value on gift cards is never redeemed.

The unredeemed value is known as gift-card breakage. While some states require unused funds be declared “unclaimed property” to be held by the state, about half of the states exempt gift cards from their unclaimed-property statutes, allowing the funds to revert to merchants, says Brian Riley, TowerGroup’s senior analyst, bank cards.

But even when merchants can reclaim gift-card breakage, they stand to gain by encouraging redemption, because when shoppers do use their cards, they often spend more than what the card is worth. At Jenson USA, the average gift card sold during holiday 2006 was for $75, while the average amount spent when the recipient came back to use the card was $130, Cachat says.

The growth of gift cards around the holidays is affecting the way some merchants stock their post-holiday shelves. Instead of clearing out merchandise in January, for example, some are adding fresh seasonal merchandise at full price to appeal to shoppers flush with gift cards, consultant Bjornson says.

“As our [gift card] sales go up and down, we do increase our inventory levels,” says Cachat. Jenson USA uses inventory forecasting software that triggers an increase in purchase levels that corresponds to an increase in card sales.

But while gift cards can certainly boost holiday and postholiday revenue, they’re not only for gifters. Many multichannel merchants are creating marketing programs that use the cards to retain and reactivate customers.

A company might send gift cards to high-spending customers who haven’t purchased within the past 90 days, for instance, in order to reactivate them. Gift cards could also be a reward for loyalty-program members who reach a certain spending threshold. Or instead of offering $10 off a particular purchase, a merchant might find that response improves when it gives customers a $10 gift card instead. Jenson USA, for one, offers preloaded $20 gift cards as incentives for big-ticket purchases. The company tracks them as inventory items and expenses them as a promotion when they’re used, Cachat says, trimming the actual cost to the company.

“We can use the gift card as a great promotional tool to drive any type of behavior,” says Daniel Horne, a marketing professor at Providence College in Rhode Island and a consultant with Giftex, a London-based provider of gift-card programs. “If you want anyone to buy a certain sweater, give them a $10 gift card to do it.” Consumers respond well to gift-card promotions because they understand their value, Horne says. And whereas the promise of “$10 off” is intangible, receiving a plastic gift card in the mail is like receiving an unexpected cash gift.

A growing number of business-to-consumer merchants are using gift cards to branch out into the corporate gifts and incentives market. “B-to-b is going to be the next big thing for gift cards,” Horne says.

Sometimes the consumer demand for the programs precedes any plans on the part of the merchant. “We had no intention of having a corporate program originally,” says Manish Shrivastava, director of incentives at Atlanta-based big-box retailer Home Depot,” but we had so much demand from people who wanted the gift card” that the company launched a program four years ago, “Now it’s a very important aspect of our business.”

Gearing up for gift carding

Launching a gift-card program can be as simple as contacting a third-party provider. In fact, some experts advise merchants not to try to handle the technology inhouse. “I have seen retailers fail to really take advantage of all the opportunities gift cards have because they are stuck in the IT development,” Horne says.

Options abound, and costs vary widely depending on the services that come with the cards. Small merchants can get started for a few hundred dollars, says Brenda Gilpatrick of Your Fantastic Plastic, an Atlanta-based gift-card consultancy. VestaCard.com, for example, offers a gift-card starter kit with 500 cards, a programmed card reader terminal, a countertop card dispenser, and tech support for $995.

But while a simple set-up like that may be all that a mom-and-pop store needs, multichannel merchants setting up a gift-card program could benefit from value-added services such as real-time processing and the ability to track and redeem cards in multiple channels.

Datavantage/CommercialWare offers a Web-services architecture that allows all of a merchant’s channels to communicate in real time so that consumers can buy the card in one channel and redeem it in another, says director of engineering Erik Holm. The Cleveland-based provider charges about $30,000-$50,000 as a “starting range” for its software, depending on what’s needed, says Laura Naylor, vice president of marketing.

King Arthur Flour, the baking-supplies manufacturer that also produces The Baker’s Catalogue, chose CommercialWare’s solution because of its cross-channel capabilities. The software has provided The Baker’s Catalogue with additional marketing opportunities as well, says Jessica Frechette, manager of software solutions for Norwich, VT-based King Arthur. For example, the company ran a promotion in which customers who purchased sticky buns for Mother’s Day received a $5 gift card. And besides the actual plastic cards, King Arthur now offers electronic gift cards sent via e-mail that can be used immediately.

While the marketing advantages of gift cards may be obvious, the cards aren’t problem-free, notes Riley of TowerGroup. Regulatory issues remain (see “A freeze on fees,” right), raising the prospect of problems down the road. Gift-card use has “grown so quickly and unexpectedly that the regulations that surround them aren’t yet defined,” Riley says. Though roughly a dozen states have passed legislation protecting consumers’ interests, the regulations vary widely.

A more immediate concern for merchants is that the anonymous nature of gift cards makes them ripe for fraud. Stolen or hacked credit-card numbers have been used to buy gift cards, which can be redeemed without a signature or ID verification. Internal fraud can also be an issue, as clerks pocket cards that have a balance remaining, switch a full card for an empty one, or purposely underload the cards, later stealing the balance on another card, Riley says.

Wilmette, IL-based Ann Meyer has written for the Chicago Tribune and Small Business Review, among other publications.

Personalizing an impersonal gift

David Patterson at Edwin Watts Golf knows that the only factor keeping some consumers from giving gift cards is their impersonal nature. So just before Thanksgiving, he introduced a personalized photo gift card from Arroweye Solutions. “It’s a big winner,” he says, noting that it brought in an incremental 2% in business during the holidays.

The program also helped Edwin Watts Golf stand out from its peers, says Patterson, Internet director at the Fort Walton Beach, FL-based cataloger/retailer. “It’s unique. Nobody else in the golf industry does it.”

Besides the gift cards, which can be customized with text as well as photos, Chicago-based Arroweye Solutions offers more than 3,000 greeting-card designs and gift-card boxes, says chief customer officer Jeff Keller.

“We’ve made an impersonal product highly personalized,” Keller says. “It looks like you’ve spent a lot of time thinking and creating and being involved in the process than just picking up a gift card and giving it to someone.”

Handbag merchant eBags sends the personalized greeting cards as birthday cards or thank-you notes to customers to boost loyalty, says director of merchandising Jonathan Fox. Occasionally the Greenwood Village, CO-based company will throw in a small-denomination gift card. “You hope all the little things you do bring you more business. When you send someone a birthday card, you just want them to remember you.”

Milk, bread, and gift cards

The drive for convenience is fueling one of the hottest trends within the gift-card sector: selling gift cards in third-party locations such as the local supermarket. About 17% of gift-card sales this past holiday season were made off-site from the merchant where the card was redeemable, according to a BIGresearch study for the National Retail Federation. These off-site card malls “are responsible for increasing the growth of gift cards,” says Daniel Horne, marketing professor at Providence College. “They are increasing the footprint of these merchants.”

The market leader in marketing gift-card malls to retailers is Pleasanton, CA-based Blackhawk Network, a unit of supermarket giant Safeway. The division was launched in 2003 after it became apparent that selling gift cards on racks inside Safeway supermarkets was a hit, says Teri Llach, group vice president at Blackhawk Network. Besides merchant gift cards, the malls display stored-value cards from AmericanExpress and MasterCard, prepaid phone cards, and travel and entertainment cards.

The concept took off because consumers appreciate the convenience of being able to shop for gift cards without having to drive to a merchant’s location, Llach says. “You basically have a one-stop shop, so no longer do you have to run around from store to store.”

Blackhawk has more than 200 card partners, including multichannel merchants Macy’s, Nordstrom, and Barnes & Noble. More than 60,000 stores display Blackhawk’s gift-card racks, and the program reaches more than 135 million consumers a week, the company says. Blackhawk is also looking for new destinations, such as airports and shopping malls, Llach says.

While terms vary, typically Blackhawk collects a commission on sales of merchant-branded gift cards, Llach says. Blackhawk also offers card-processing services to participating partners, though it will work with other vendors at the merchant’s request.

Participation has paid off for Omaha Steaks, says Beth Weiss, spokesperson for the food gifts merchant, in part by raising awareness of the company. “We’re delighted to be in the mix in stores that offer a multitude of gift cards,” Weiss says. “It’s a fast-growing segment of the Omaha Steaks business.”

Home improvement products merchant Home Depot is also pleased with the program. It has launched numerous denominations of gift cards to sell through Blackhawk Network, up to $200. “We’ve had a hard time keeping gift cards on the shelf through Blackhawk,” says director of incentives Manish Shrivastava.

To stand out among the competition, merchants are placing more emphasis on the design of their cards, says Brenda Gilpatrick, president of gift-card consultancy Your Fantastic Plastic. One strategy is to offer occasion-specific cards that say “Happy Birthday” or “Congratulations,” she notes. “People like the card to be slanted toward the occasion. It looks like a little more thought was put into it.”

A freeze on fees

The dormancy fees and expiration dates that used to be common with merchants’ gift cards have largely vanished due to complaints from consumers, legislators, and most recently, the Federal Trade Commission (FTC).

The FTC recently brought its first gift-card law-enforcement action when it accused Kmart Corp. of deceptive advertising surrounding the terms of its gift cards. Beginning in 2003, the FTC said, Kmart had neglected to make clear to cardholders that it would charge a retroactive dormancy fee of $2.10 a month if the card went unused for 24 months. Those terms appeared in fine print on the back of the card in “legalese,” the FTC reported, and the company made no presale disclosures in online sales, the agency said. According to the FTC, “Since December 2005, Kmart’s Website stated that the gift cards never expire, even though the dormancy fee caused cards valued at $50.40 or less to expire after two years of inactivity.”

Though Kmart admitted no wrongdoing, it stopped charging the dormancy fee as of May 2006. “In an effort to better meet our customer needs, Kmart has removed all expiration dates and fees from its gift cards,” says Kimberly Freely, spokesperson for Kmart parent company Sears Holding Corp. This past March, the FTC reported that Kmart had agreed to settle the charges and implement a refund program.

Before the FTC action, many state legislatures had confronted the issue of gift-card terms, with about a dozen states banning expirations dates and/or dormancy fees. Others restrict terms, with regulations that require clear disclosure.

The regulations have led most merchants to eliminate gift-card fees and expiration dates altogether. Even in states without laws covering gift cards, merchants don’t want to be at a competitive disadvantage, experts say.