March 7, 2008
Bankrupting Gift Cards
That gift card you’re holding might not be worth the plastic it’s printed on. As it turns out, one of the casualties of retailers filing for bankruptcy protection are gift card balances that get zeroed out in the process.
Jon Tapper, a public relations executive who received gift cards for Sharper Image, found out recently that they were worthless.
“I love gift cards, but now this makes me think twice,” he told The Associated Press.
Carol Ann Razza, who lost several hundred dollars when the Georgette Klinger salon closed last year, put it another way. “You really feel like you were robbed,” she said.
Mr. Tapper and Ms. Razza are not alone as the growing number of retailers filing for bankruptcy or liquidating outright means that many gift cards have become nothing more than plastic waste.
Brian Riley, senior analyst at The Tower Group, told the AP that consumers could lose more than $75 million from stores and restaurant closings this year.
Some believe that the number of retailers reorganizing or going out of business will reach a level this year that has not been seen since the recession of 1991.
“You will see a lot of frustration among customers. You basically stole (money) out of the customers’ pocket. They will never forgive you,” said C. Britt Beemer, chairman of America’s Research Group.
Not honoring gift cards can come back to bite retailers who find customers have moved on to other stores.
Brookstone has sought to take advantage of the ill will created by Sharper Image’s refusal to accept its gift cards by offering 25 percent off any purchase to consumers who hand over the now worthless plastic at the time of purchase.
Sharper Image has said that it intends to reinstate the cards at some point in the future although it did not provide a date when questioned by the AP.
Not all companies that go into Chapter 11 immediately void their cards. In the recent case where NRDC Equity Partners bought Fortunoff, the new owner decided to honor the gift cards.
Discussion Questions: Is there any way for a retailer to rebound from the bad taste it creates by refusing to honor gift cards? Do you see consumers losing confidence in buying gift cards this year due to news of retailer bankruptcies and closings?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Since most bankrupt retailers usually don’t rebound anyway I see the chances as slim to none.
The best way to prevent problems is to honor the gift cards. In fact, a retailer that sells gift cards knowing they will be filing for bankruptcy is committing fraud, in my opinion. Personally I won’t be buying any Sears gift cards regardless of how much they are discounted.
There is only one way this makes sense from a long term business perspective. Since gift cards can’t be booked as sales until they are redeemed, The Sharper Image is vacating guaranteed sales. This implies they have no intention of emerging from bankruptcy. It also makes one wonder if they already spent the funds.
Sounds like an upsell opportunity @ POS….
“Sir, for an extra $5.00 we offer giftcard insurance. It’s really great. It protects you in the event we go bust. Was that a yes, then?”
…or maybe not…. 😉
This was bound to happen and it’s a big deal. Even though the vast majority of Americans were not directly affected, (and may not even have known that Sharper Image exists), the mega publicity around the Sharper Image gift card debacle exposes the vulnerability of gift cards and is going to negatively impact ALL retailers’ future gift card marketing. The seed of mistrust has been sown and is sprouting. Shoppers are aware that stores can “go under.”
Mass retailers such as Target and Wal-Mart may still be universally “trusted” by average shoppers to honor gift cards, but who else? Many of those who were told that giving cash gifts is “vulgar” and that it’s “classier” to give gift cards will be thinking twice, after this.
This gift card issue can be called a customer service gauntlet. Using the Sharper Image example, it is unfathomable to me that SI would actually refuse gift cards.
In the bankruptcy proposal, Sharper Image had to have come up with a business plan to be able to continue operating. Did they factor all the lost customers and revenue because in their forecast targets? Did the trustee realize that invalidating all those gift cards is reputation suicide? Boggles the mind.
But kudos to Brookstone for picking up the customer service slack. SI’s loss is Brookstone’s gain (and I suspect it will be a big gain). Moral of the story: a little customer service common sense goes a long way.
When is the American consumer going to wake up and realize that the gift card idea is stacked against them? A company is given money upfront, then tells the consumer that they have to use it soon or “we’ll just keep the money” (taking it out in monthly installments until the card is no longer of value). And the company is really hoping we lose or misplace the card. They even have a line item for “breakage” (a sizeable one as we saw with Best Buy).
Now, we learn that they can keep our money for nothing if they file for bankruptcy. And how about that Visa Gift Card that charges you $4 to give $50 as a gift? What do Americans think a checking account is for? Imagine, giving $50 for $50 and the recipient can spend it anywhere they want? I’m waging a one-man war in my family, begging them not to buy gift cards or gift certificates. Send cash, check, or money order to….
Sharper Image now says they’ll redeem gift cards, but only for merchandise that’s at least double the gift card value.
These folks are magicians: they’ve taken bad pr and made it worse. The usual practice for Chapter 11 retailers: redeem gift cards and gift certificates at full value, with no special restrictions. When airlines go into Chapter 11, they honor their frequent flyer miles.
Businesses that alienate their best customers: Sharper Image gets the Sales Prevention Retailer of the Month Award.
There is no logical reason for a company that expects to emerge from bankruptcy protection to choose not to honor their gift cards. It goes beyond lack of common sense to pure stupidity.
Kudos to the new owners of Fortunoff to have the vision to honor their gift cards. Sharper Image has made so many common-sense errors in recent years that it does not surprise me that they would decide in their filing not to honor their gift cards.
However, the part we may not understand is the bankruptcy court’s attitude on this issue. The idea of a bankruptcy filing is usually to ensure maximized value for the bond holders and the preferred share holders–not the common stock shareholders and certainly not the consumer. So it may make sense to cancel the gift card liability as part of the value-maximization effort.
Regardless of this financial necessity, it is suicide to good customer relations and likely guarantees an eventual failure for that retailer.
Dave summed up my feelings exactly: just one more reason to avoid these %^&#$% things!
As for the specifics of the case, I guess it isn’t surprising that a company that makes enough questionable decisions to end up in Chapter 11 has made one more.
I think we need to ask two important questions in these situations: Is the goal of the business to continue to attract new and existing customers, or is it to simply salvage whatever assets it can in hopes of being sold?
If the answer to the first question is yes, then continuing to accept gift cards should be a no-brainer. However, if the business is now being viewed by creditors and simply a warehouse of product ready for liquidation, then maintaining a relationship with the marketplace is totally unnecessary.
As for competing businesses accepting a company’s gift cards, I say kudos to them for taking the initiative and seeing it as an opportunity to strengthen their position in the marketplace.
The failure of even one major gift card program at the consumer’s expense tars all other programs, regardless of their honorable intentions. This episode is a setback for the entire concept–it moves gift cards into the category of risky securities–except they may never appreciate in value for the bearer, only decline.
Meanwhile the gift card issuer earns investment income on the float between card issuance and card redemption. Has anyone calculated what this adds up to industry-wide? What percentage of current retail profits?
A gift card is a loan, from the shopper to the store, that is redeemable in merchandise. It is inherently profitable to the retailer because the liability is discounted–that is, exchanged for merchandise at retail value that was acquired at wholesale cost.
I’d propose a simple change in bankruptcy laws that puts gift card liabilities ahead of all other stakeholders–or at least on an equal footing with major lenders–and requires cash reimbursement from the front of the line in the event of a bankruptcy filing. This change would force organizations to arrange their finances to protect consumers in the first place.
To the consumer, a gift card is the equivalent of paying for a product in advance while the seller collects interest and hopes the card is never redeemed. This is not an investment by the consumer. The holder of the card should be able to use it for a purchase at any time or claim the purchase price with no strings attached.
Their decision to dishonor the gift cards they sold soils all gift cards. It also damages business–another reason for the consumer to not trust us.
Brookstone’s offer to accept the Sharper Image gift cards is good PR and good business. Frankly, I’m surprised more retailers haven’t jumped on the opportunity.
To be honest, I cringe at store specific gift cards. Being forced to use them, or buying them for someone and forcing them to use it at any place is painful. Half the time I sell it to someone I know at a slight discount if I know I’ll probably never use it.
When I buy gift cards for people, I make sure it’s for the most popular commercial real estate company that covers shopping malls. For me, it’s Cadillac-Fairview, who covers 80-90% of the major shopping malls in my area. My friends or family members can use it at any store in any of their malls, with the exception of the usual products like cigarettes or prescriptions (I think) which are always excluded.
As for bankrupt cards, it’s too bad. People just have to make sure they use them pretty quick if it’s for a chain with sketchy financials or some small retailer you never know will close up shop next week.
Luckily, I use mine quickly or pawn them off, so not a big deal from a personal standpoint.
More Discussions
Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?OpenAI Names the Infrastructure Standard for Agentic Commerce
Will OpenAI or Google (or another entity) set the gold standard for agentic commerce?Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?
Since most bankrupt retailers usually don’t rebound anyway I see the chances as slim to none.
The best way to prevent problems is to honor the gift cards. In fact, a retailer that sells gift cards knowing they will be filing for bankruptcy is committing fraud, in my opinion. Personally I won’t be buying any Sears gift cards regardless of how much they are discounted.
There is only one way this makes sense from a long term business perspective. Since gift cards can’t be booked as sales until they are redeemed, The Sharper Image is vacating guaranteed sales. This implies they have no intention of emerging from bankruptcy. It also makes one wonder if they already spent the funds.
Sounds like an upsell opportunity @ POS….
“Sir, for an extra $5.00 we offer giftcard insurance. It’s really great. It protects you in the event we go bust. Was that a yes, then?”
…or maybe not…. 😉
This was bound to happen and it’s a big deal. Even though the vast majority of Americans were not directly affected, (and may not even have known that Sharper Image exists), the mega publicity around the Sharper Image gift card debacle exposes the vulnerability of gift cards and is going to negatively impact ALL retailers’ future gift card marketing. The seed of mistrust has been sown and is sprouting. Shoppers are aware that stores can “go under.”
Mass retailers such as Target and Wal-Mart may still be universally “trusted” by average shoppers to honor gift cards, but who else? Many of those who were told that giving cash gifts is “vulgar” and that it’s “classier” to give gift cards will be thinking twice, after this.
This gift card issue can be called a customer service gauntlet. Using the Sharper Image example, it is unfathomable to me that SI would actually refuse gift cards.
In the bankruptcy proposal, Sharper Image had to have come up with a business plan to be able to continue operating. Did they factor all the lost customers and revenue because in their forecast targets? Did the trustee realize that invalidating all those gift cards is reputation suicide? Boggles the mind.
But kudos to Brookstone for picking up the customer service slack. SI’s loss is Brookstone’s gain (and I suspect it will be a big gain). Moral of the story: a little customer service common sense goes a long way.
When is the American consumer going to wake up and realize that the gift card idea is stacked against them? A company is given money upfront, then tells the consumer that they have to use it soon or “we’ll just keep the money” (taking it out in monthly installments until the card is no longer of value). And the company is really hoping we lose or misplace the card. They even have a line item for “breakage” (a sizeable one as we saw with Best Buy).
Now, we learn that they can keep our money for nothing if they file for bankruptcy. And how about that Visa Gift Card that charges you $4 to give $50 as a gift? What do Americans think a checking account is for? Imagine, giving $50 for $50 and the recipient can spend it anywhere they want? I’m waging a one-man war in my family, begging them not to buy gift cards or gift certificates. Send cash, check, or money order to….
Sharper Image now says they’ll redeem gift cards, but only for merchandise that’s at least double the gift card value.
These folks are magicians: they’ve taken bad pr and made it worse. The usual practice for Chapter 11 retailers: redeem gift cards and gift certificates at full value, with no special restrictions. When airlines go into Chapter 11, they honor their frequent flyer miles.
Businesses that alienate their best customers: Sharper Image gets the Sales Prevention Retailer of the Month Award.
There is no logical reason for a company that expects to emerge from bankruptcy protection to choose not to honor their gift cards. It goes beyond lack of common sense to pure stupidity.
Kudos to the new owners of Fortunoff to have the vision to honor their gift cards. Sharper Image has made so many common-sense errors in recent years that it does not surprise me that they would decide in their filing not to honor their gift cards.
However, the part we may not understand is the bankruptcy court’s attitude on this issue. The idea of a bankruptcy filing is usually to ensure maximized value for the bond holders and the preferred share holders–not the common stock shareholders and certainly not the consumer. So it may make sense to cancel the gift card liability as part of the value-maximization effort.
Regardless of this financial necessity, it is suicide to good customer relations and likely guarantees an eventual failure for that retailer.
Dave summed up my feelings exactly: just one more reason to avoid these %^&#$% things!
As for the specifics of the case, I guess it isn’t surprising that a company that makes enough questionable decisions to end up in Chapter 11 has made one more.
I think we need to ask two important questions in these situations: Is the goal of the business to continue to attract new and existing customers, or is it to simply salvage whatever assets it can in hopes of being sold?
If the answer to the first question is yes, then continuing to accept gift cards should be a no-brainer. However, if the business is now being viewed by creditors and simply a warehouse of product ready for liquidation, then maintaining a relationship with the marketplace is totally unnecessary.
As for competing businesses accepting a company’s gift cards, I say kudos to them for taking the initiative and seeing it as an opportunity to strengthen their position in the marketplace.
The failure of even one major gift card program at the consumer’s expense tars all other programs, regardless of their honorable intentions. This episode is a setback for the entire concept–it moves gift cards into the category of risky securities–except they may never appreciate in value for the bearer, only decline.
Meanwhile the gift card issuer earns investment income on the float between card issuance and card redemption. Has anyone calculated what this adds up to industry-wide? What percentage of current retail profits?
A gift card is a loan, from the shopper to the store, that is redeemable in merchandise. It is inherently profitable to the retailer because the liability is discounted–that is, exchanged for merchandise at retail value that was acquired at wholesale cost.
I’d propose a simple change in bankruptcy laws that puts gift card liabilities ahead of all other stakeholders–or at least on an equal footing with major lenders–and requires cash reimbursement from the front of the line in the event of a bankruptcy filing. This change would force organizations to arrange their finances to protect consumers in the first place.
To the consumer, a gift card is the equivalent of paying for a product in advance while the seller collects interest and hopes the card is never redeemed. This is not an investment by the consumer. The holder of the card should be able to use it for a purchase at any time or claim the purchase price with no strings attached.
Their decision to dishonor the gift cards they sold soils all gift cards. It also damages business–another reason for the consumer to not trust us.
Brookstone’s offer to accept the Sharper Image gift cards is good PR and good business. Frankly, I’m surprised more retailers haven’t jumped on the opportunity.
To be honest, I cringe at store specific gift cards. Being forced to use them, or buying them for someone and forcing them to use it at any place is painful. Half the time I sell it to someone I know at a slight discount if I know I’ll probably never use it.
When I buy gift cards for people, I make sure it’s for the most popular commercial real estate company that covers shopping malls. For me, it’s Cadillac-Fairview, who covers 80-90% of the major shopping malls in my area. My friends or family members can use it at any store in any of their malls, with the exception of the usual products like cigarettes or prescriptions (I think) which are always excluded.
As for bankrupt cards, it’s too bad. People just have to make sure they use them pretty quick if it’s for a chain with sketchy financials or some small retailer you never know will close up shop next week.
Luckily, I use mine quickly or pawn them off, so not a big deal from a personal standpoint.