October 13, 2008
Credit Crisis Could Impact Gift Cards
By Tom Ryan
With consumer fears growing about everything these days, the financial crisis may affect the sale of gift cards this holiday season. The fear is that the possible bankruptcy of a retailer will significantly reduce the value of gift cards or even make them worthless.
Such a situation happened when Sharper Image Corp filed for bankruptcy in February. It initially stopped honoring its gift certificates and later liquidated its stores.
These consumer concerns are expected to rise as news of retail bankruptcies and struggles become more apparent. The list of bankruptcies so far this year include Linens ‘n Things, Mervyns, Whitehall Jewelers, Boscov’s, Barbeques Galore, Ms. Fields and Bennigan’s. A brutal holiday season would put more retailers on the edge.
“I could see where gift card usage could drop 10 to 20 percent this year based on those feelings,” Britt Beemer, chairman and founder of America’s Group, told Reuters. “Consumers don’t know which stores are in trouble, but when you start seeing Linens and other retailers closing stores it does give you pause to say, ‘Who is next?’”
Consumers have little recourse should a retailer suspend its gift-card program. Under bankruptcy laws, retailers do not have to honor their gift cards once they file for Chapter 11 protection. Gift cardholders are considered unsecured creditors, who get reimbursed only after secured creditors and other priority creditors are paid in full. If anything, only a small portion of the claim is usually paid off.
“Consumers should consider the financial conditions of the retailers they hold the cards for,” Stacy Janiak, vice chairman and U.S. retail leader for Deloitte, told Reuters. “It feels like cash in your wallet, but it isn’t considered cash in bankruptcy courts. It can go to waste.”
Last year, consumers bought $26.3 billion worth of gift cards over the holiday season, according to the National Retail Federation.
Discussion Questions: Do you see consumers’ worries over possible retail bankruptcies affecting overall gift card sales this holiday season? Should retailers be doing anything to shore up confidence in the viability of their gift cards?
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Gift card sales will be down this holiday for three reasons:
1. The economy. There is no escaping the news and thus consumers are increasingly aware that if large banks can fail, then so can retailers. Further, the economic implication for retailers is a decline in sales for the holiday period. Gift cards will not be immune from the downdraft.
2. Markdowns. Given the already heavy promotion already taking place, it is not unreasonable to assume that gift buyers will be more likely to buy gifts on sale given the values. This holiday season has already been described as bountiful for consumers who will be spending money, given the amount and aggressiveness of retailer promotion.
3. One by-product of the over-engineering of our financial system, along with the non-stop multi-channel information overload age we live in, is likely going to be a return to simplicity and genuineness (along with social responsibility). The implications of these changes for gift cards are not positive either.
Worries over potential retail bankruptcies may have a small effect on gift card sales. In an effort to lure customers into their stores, competing retailers may want to accept a bankrupt competitor’s gift cards.
I think that consumers will spend less per gift this year or cut back on the number of gifts given. In this environment, with gift cards clearly showing how much the giver spent, will consumers opt to buy or make gifts that have higher perceived values?
Despite some real risks, I’m guessing gift cards are here to stay. A bigger problem for this type of gift-giving will likely be a probable overall cutback in consumer spending in the upcoming holiday season, and even that may be questionable since gift cards allow the giver-purchaser to very precisely control the amount of a gift. Gift cards are pretty well entrenched, too; one estimate of their value for this year is around $100 billion. According to a survey by Consumer Reports National Retail Center, 62% of those interviewed indicated they were going to purchase gift cards.
In addition, gift cards are currently being very aggressively merchandised by supermarket chains. Giant Eagle and Shop ‘n Save in Pittsburgh, for example, are providing double-fuel perks with the purchase of gift cards. Moreover, if a supermarket chain does go belly up, the new operators of the stores may well find it in their interest to honor such cards. Even though there is a downside, it is my belief that gift cards will continue to play a significant role in holiday sales at supermarkets, in any event.
I was thinking this might be an issue, because of the wide press on Sharper Image not honoring their gift cards and the number of bankruptcies since. And I posed this exact question to the National Retail Federation in their Sept 23 press conferencec call on a BIG Research survey completed. Their answer was that they don’t expect it to be an issue to have much of an affect on gift card sales. I just don’t know if I can agree with that.
I do think gift cards are here to stay–and that it’s entirely within the control of retailers to maintain consumer confidence in them. If retail chains take the steps folks have outlined here–honoring cards even if they go into Chapter 11, honoring the cards of bankrupt competitors–gift cards will continue to be the convenient currency of seasonal obligations and an easy answer for those of us who have to come up with something for the perennially hard-to-buy for. Teenage relatives, anyone?
But if the industry undermines the faith and credit–and I use those terms deliberately–of gift cards as in-store currency, even piecemeal, the whole concept will become radioactive fast.
When mall gift cards replaced certificates several years ago, and added service fees and selective redeemability, my parents, who are now in their 80s, were incensed and swore they’d never buy them again. That turned out to be impractical. But if even one card in the wallet of that generation–or perhaps even us Boomers–that may be all it takes to shut down the industry in a given market segment.
Just sayin’.
It’s not the stores’ bankruptcy that consumers will be worrying about…it’s their own. I do think that gift card sales will be disproportionately affected, but in a different way than some are suggesting. When consumers are cutting back on everything, they won’t get a gift for the marginal people on their list, and I suspect those gifts are more likely to be gift cards than gifts for core family members.
I believe that gift card sales will be slightly impacted as will overall holiday sales and spending. I also believe that with several larger retailers filing for bankruptcy over the last year and the direct impact on redemption of their branded cards, yes, consumers may steer clear of ‘closed loop’ gift cards. However, the open loop gift card, i.e. Amex, Visa and Mastercard, will maintain a strong gift purchase. Clearly it gives the receiver many purchasing options–including necessities of gas, groceries and utilities. In fact, after writing that out, those cards may very have a HUGE boom in sales for this holiday.
Having read through the long list of comments, I can only ask why anyone would think gift cards would be excluded from the “down” category for retail. I would expect to see amount per card purchased drop and that sales at risky retailers will drop (and yes, consumers do follow who is risky). I would not be surprised if redemptions went up right after Christmas. With the expected sales and the opportunity to redeem before a bankruptcy, the only issue will be inventory levels (down) so there won’t be much to buy.
This is not an issue, considering the number of lost cards or cards that are not redeemed (but still have to be kept on the books) for years. These cards are great for all of the retailers, and provide a “convenience” for many consumers. Redemption concern for the larger retailers from a fear of bankruptcy by a largely ignorant consumer, is one of the few things that will impact the sale of these cards.
As to retailers themselves, what is the guarantee supposed to say? “We pledge to honor our giftcards when/if we go BANKRUPT!”
Can’t see that happening.
On another note, a cursory review of this thread shows four comments directly and one indirectly suggesting our economic problems are the fault of the media. Come on! I don’t hear any of you thanking the media for reporting it when the economy is booming.
“The media” is not a monolithic entity. “The media” is a huge group of information providers of varying credibility and biases. It is up to each individual to do their research and decide whom to believe, rather than the ubiquitous complaints about “the media” every time something bad happens.
In spite of the media, in spite of the predictions that the sky is falling, in spite of the gasps of doom and gloom, Christmas will fall exactly on December 25th. That’s my prediction.
Strangely, it happens every year, on the same day–imagine that! Something else happens every year on that day. People gift at Christmas. They will buy gift cards! They like them. They will continue their current trend. They will buy more. Retailers will continue to be bogged in lack of understanding of their impact on the deferment of seasonal sales. Nevertheless, the story will continue. Christmas will come, in spite of the predictions otherwise. People will gift. Sales will be up in January, February, March and so on. Retailers will be scratching their heads as to what happened.
All that being said, just like with anything, there should be some good sense. Follow the rule–buyer beware. Also, as a recipient of a gift card, do with it what was intended. Spend it! Spend it right away. That is why it was given. It’s a gift, not a decoration for the junk drawer and tears later when its value has been decreased by the retailer taking a dormancy fee. Spend the gift. It’s Christmas! No, wait, not until December 25th.
Everything will be affected by the 24/7 media touting, “What’s next?” Isn’t there a penalty for crying “fire” in a crowded theater? My concern is that this has proved to be a ratings boost and we are going to continue to live in a real-time “Network,” movie world–even after they fix the credit crisis and the election is over.
I’m not sure that the average consumer follows business headlines closely enough to know which retailers are teetering on the brink, unless they have already announced store closings in a particular neighborhood. You can make an argument that “cash is king” this year and in fact there is a strong practicality factor attached to gift cards rather than specific merchandise. There may not be the sharp upswing in gift card sales seen over the past few years–given the overall outlook for retail spending–but I still expect them to grow at an above-average pace.
I don’t think consumers think that far ahead. It’s the thought that counts. The person buying the card isn’t the one who will benefit. If consumers do buy cards, they will probably stick with the safe ones like Walmart’s.
While overall gift card sales will be down, I think major retailers with solid foundations should not see a decline in gift card sales. If they do, it is because of an overall sales decline and not just because of worried consumers. I just can’t see consumers not buying gift cards from Home Depot and Walmart this season. If personal spending goes down, gift cards make sense because the customer can define the value of the purchase.
Retailers should employ some kind of redemption guarantee if they want to improve customer confidence. Sharper Image’s move of not honoring gift cards was wrong and management must have known there was no hope in saving the company at that point. Gift cards are still a great selling tool and retailers must work to shore up customer support for them.
I think gift cards are going to have a good holiday season. People may be cutting back on the denominations but they also have less time and inclination to shop. For many, it’s a perfect holiday gift.
The big retailers are still going to be around and I don’t think gift card redemption is an issue.
I’m with Max on this one. Gift card sales may well be down, but I’m not sure it will be fear of retailer bankruptcies driving it. The virtue of a gift is that its value is “in the eye of the beholder.” The value of a gift card is an absolute number.
The question is, will gift card sales decline because of the bankruptcy of retailers? I say the answer is a definite YES. There are two reasons for such a definite YES:
1. Once a consumer is burned, that consumer is going to be much more careful before he or she buys another gift card.
2. The media now has another store to run on about during the holiday and they are going to love this one. I think you can already see the headlines.
I agree with others commenting before me: There will be an overall decline in holiday spending this year. Gift cards will probably not be affected in specific. I also believe that consumers will wait to spend as well. Unless they are feeling secure, they won’t buy until they have to.
Some gift card buyers will undoubtedly have concerns about potential bankruptcies. But I have to believe those numbers will be small. Gift card sales overall will likely be down, but the larger reason is anxiety about personal budgets which will force shoppers to buy lower card values than in previous years.
Gift card shoppers who do have concerns also have plenty of relatively stable options to select from, e.g., Walmart and Target. And given the economy, we may see gift cards getting rung up pretty quickly after the holidays, especially for staple items and the little indulgences that cash-strapped consumers have denied themselves all year.
As for whether merchants should change their gift card policies, it would be nice if every merchant would do so simply because it’s good customer service. Barring that or any legal changes, when a retailer goes belly up, it’s still an opportunity for competitors to step in and announce they’ll honor those gift cards.
Agree with Michael Murphy. The thought of a retailer going bankrupt will not be as prevalent as the customer themselves going broke.
Less will be spent overall and I think the table has already been set by the media that there will be a bargain extravaganza at retail this Holiday, which will in turn make already low margins lower.
Sure plays to Walmart’s and Costco’s strengths, though.
I don’t believe that what motivates gift card giving has anything to do with most consumers awareness of the credit market or a favorite retailers financial status.
People give purchase gift cards because they are convenient and offer the gifter the greatest degree of flexibility in satisfying the giftee’s needs (seasonal or otherwise).
It is possible that the total dollar value of gift cards may decline due to less disposable income but it isn’t likely, in my mind, that they will decline in prevalence. Some retailers, like Walmart, may even see a surge in number as well as volume due to their ability to “streeeetch” a dollar in gift terms.
Gift cards are IOUs…and in this frightening economic climate it wouldn’t be surprising if customers wanted to give something a little more reliable.
I agree with several of my colleagues.
(1) The shopper is not keenly aware of the financial conditions of any given retailer.
(2) The fact is that the amount spent is transparent and that the shopper is trying to pull back spending is a greater deterrent to the use of a gift card.
That, however, opens a great opportunity for a creative retailer. Sell the gift card at a 20% discount to enhance the value of the gift itself. Then make the gift card redeemable after January 1 to give some protection of a double discount on holiday merchandise.
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Gift card sales will be down this holiday for three reasons:
1. The economy. There is no escaping the news and thus consumers are increasingly aware that if large banks can fail, then so can retailers. Further, the economic implication for retailers is a decline in sales for the holiday period. Gift cards will not be immune from the downdraft.
2. Markdowns. Given the already heavy promotion already taking place, it is not unreasonable to assume that gift buyers will be more likely to buy gifts on sale given the values. This holiday season has already been described as bountiful for consumers who will be spending money, given the amount and aggressiveness of retailer promotion.
3. One by-product of the over-engineering of our financial system, along with the non-stop multi-channel information overload age we live in, is likely going to be a return to simplicity and genuineness (along with social responsibility). The implications of these changes for gift cards are not positive either.
Worries over potential retail bankruptcies may have a small effect on gift card sales. In an effort to lure customers into their stores, competing retailers may want to accept a bankrupt competitor’s gift cards.
I think that consumers will spend less per gift this year or cut back on the number of gifts given. In this environment, with gift cards clearly showing how much the giver spent, will consumers opt to buy or make gifts that have higher perceived values?
Despite some real risks, I’m guessing gift cards are here to stay. A bigger problem for this type of gift-giving will likely be a probable overall cutback in consumer spending in the upcoming holiday season, and even that may be questionable since gift cards allow the giver-purchaser to very precisely control the amount of a gift. Gift cards are pretty well entrenched, too; one estimate of their value for this year is around $100 billion. According to a survey by Consumer Reports National Retail Center, 62% of those interviewed indicated they were going to purchase gift cards.
In addition, gift cards are currently being very aggressively merchandised by supermarket chains. Giant Eagle and Shop ‘n Save in Pittsburgh, for example, are providing double-fuel perks with the purchase of gift cards. Moreover, if a supermarket chain does go belly up, the new operators of the stores may well find it in their interest to honor such cards. Even though there is a downside, it is my belief that gift cards will continue to play a significant role in holiday sales at supermarkets, in any event.
I was thinking this might be an issue, because of the wide press on Sharper Image not honoring their gift cards and the number of bankruptcies since. And I posed this exact question to the National Retail Federation in their Sept 23 press conferencec call on a BIG Research survey completed. Their answer was that they don’t expect it to be an issue to have much of an affect on gift card sales. I just don’t know if I can agree with that.
I do think gift cards are here to stay–and that it’s entirely within the control of retailers to maintain consumer confidence in them. If retail chains take the steps folks have outlined here–honoring cards even if they go into Chapter 11, honoring the cards of bankrupt competitors–gift cards will continue to be the convenient currency of seasonal obligations and an easy answer for those of us who have to come up with something for the perennially hard-to-buy for. Teenage relatives, anyone?
But if the industry undermines the faith and credit–and I use those terms deliberately–of gift cards as in-store currency, even piecemeal, the whole concept will become radioactive fast.
When mall gift cards replaced certificates several years ago, and added service fees and selective redeemability, my parents, who are now in their 80s, were incensed and swore they’d never buy them again. That turned out to be impractical. But if even one card in the wallet of that generation–or perhaps even us Boomers–that may be all it takes to shut down the industry in a given market segment.
Just sayin’.
It’s not the stores’ bankruptcy that consumers will be worrying about…it’s their own. I do think that gift card sales will be disproportionately affected, but in a different way than some are suggesting. When consumers are cutting back on everything, they won’t get a gift for the marginal people on their list, and I suspect those gifts are more likely to be gift cards than gifts for core family members.
I believe that gift card sales will be slightly impacted as will overall holiday sales and spending. I also believe that with several larger retailers filing for bankruptcy over the last year and the direct impact on redemption of their branded cards, yes, consumers may steer clear of ‘closed loop’ gift cards. However, the open loop gift card, i.e. Amex, Visa and Mastercard, will maintain a strong gift purchase. Clearly it gives the receiver many purchasing options–including necessities of gas, groceries and utilities. In fact, after writing that out, those cards may very have a HUGE boom in sales for this holiday.
Having read through the long list of comments, I can only ask why anyone would think gift cards would be excluded from the “down” category for retail. I would expect to see amount per card purchased drop and that sales at risky retailers will drop (and yes, consumers do follow who is risky). I would not be surprised if redemptions went up right after Christmas. With the expected sales and the opportunity to redeem before a bankruptcy, the only issue will be inventory levels (down) so there won’t be much to buy.
This is not an issue, considering the number of lost cards or cards that are not redeemed (but still have to be kept on the books) for years. These cards are great for all of the retailers, and provide a “convenience” for many consumers. Redemption concern for the larger retailers from a fear of bankruptcy by a largely ignorant consumer, is one of the few things that will impact the sale of these cards.
As to retailers themselves, what is the guarantee supposed to say? “We pledge to honor our giftcards when/if we go BANKRUPT!”
Can’t see that happening.
On another note, a cursory review of this thread shows four comments directly and one indirectly suggesting our economic problems are the fault of the media. Come on! I don’t hear any of you thanking the media for reporting it when the economy is booming.
“The media” is not a monolithic entity. “The media” is a huge group of information providers of varying credibility and biases. It is up to each individual to do their research and decide whom to believe, rather than the ubiquitous complaints about “the media” every time something bad happens.
In spite of the media, in spite of the predictions that the sky is falling, in spite of the gasps of doom and gloom, Christmas will fall exactly on December 25th. That’s my prediction.
Strangely, it happens every year, on the same day–imagine that! Something else happens every year on that day. People gift at Christmas. They will buy gift cards! They like them. They will continue their current trend. They will buy more. Retailers will continue to be bogged in lack of understanding of their impact on the deferment of seasonal sales. Nevertheless, the story will continue. Christmas will come, in spite of the predictions otherwise. People will gift. Sales will be up in January, February, March and so on. Retailers will be scratching their heads as to what happened.
All that being said, just like with anything, there should be some good sense. Follow the rule–buyer beware. Also, as a recipient of a gift card, do with it what was intended. Spend it! Spend it right away. That is why it was given. It’s a gift, not a decoration for the junk drawer and tears later when its value has been decreased by the retailer taking a dormancy fee. Spend the gift. It’s Christmas! No, wait, not until December 25th.
Everything will be affected by the 24/7 media touting, “What’s next?” Isn’t there a penalty for crying “fire” in a crowded theater? My concern is that this has proved to be a ratings boost and we are going to continue to live in a real-time “Network,” movie world–even after they fix the credit crisis and the election is over.
I’m not sure that the average consumer follows business headlines closely enough to know which retailers are teetering on the brink, unless they have already announced store closings in a particular neighborhood. You can make an argument that “cash is king” this year and in fact there is a strong practicality factor attached to gift cards rather than specific merchandise. There may not be the sharp upswing in gift card sales seen over the past few years–given the overall outlook for retail spending–but I still expect them to grow at an above-average pace.
I don’t think consumers think that far ahead. It’s the thought that counts. The person buying the card isn’t the one who will benefit. If consumers do buy cards, they will probably stick with the safe ones like Walmart’s.
While overall gift card sales will be down, I think major retailers with solid foundations should not see a decline in gift card sales. If they do, it is because of an overall sales decline and not just because of worried consumers. I just can’t see consumers not buying gift cards from Home Depot and Walmart this season. If personal spending goes down, gift cards make sense because the customer can define the value of the purchase.
Retailers should employ some kind of redemption guarantee if they want to improve customer confidence. Sharper Image’s move of not honoring gift cards was wrong and management must have known there was no hope in saving the company at that point. Gift cards are still a great selling tool and retailers must work to shore up customer support for them.
I think gift cards are going to have a good holiday season. People may be cutting back on the denominations but they also have less time and inclination to shop. For many, it’s a perfect holiday gift.
The big retailers are still going to be around and I don’t think gift card redemption is an issue.
I’m with Max on this one. Gift card sales may well be down, but I’m not sure it will be fear of retailer bankruptcies driving it. The virtue of a gift is that its value is “in the eye of the beholder.” The value of a gift card is an absolute number.
The question is, will gift card sales decline because of the bankruptcy of retailers? I say the answer is a definite YES. There are two reasons for such a definite YES:
1. Once a consumer is burned, that consumer is going to be much more careful before he or she buys another gift card.
2. The media now has another store to run on about during the holiday and they are going to love this one. I think you can already see the headlines.
I agree with others commenting before me: There will be an overall decline in holiday spending this year. Gift cards will probably not be affected in specific. I also believe that consumers will wait to spend as well. Unless they are feeling secure, they won’t buy until they have to.
Some gift card buyers will undoubtedly have concerns about potential bankruptcies. But I have to believe those numbers will be small. Gift card sales overall will likely be down, but the larger reason is anxiety about personal budgets which will force shoppers to buy lower card values than in previous years.
Gift card shoppers who do have concerns also have plenty of relatively stable options to select from, e.g., Walmart and Target. And given the economy, we may see gift cards getting rung up pretty quickly after the holidays, especially for staple items and the little indulgences that cash-strapped consumers have denied themselves all year.
As for whether merchants should change their gift card policies, it would be nice if every merchant would do so simply because it’s good customer service. Barring that or any legal changes, when a retailer goes belly up, it’s still an opportunity for competitors to step in and announce they’ll honor those gift cards.
Agree with Michael Murphy. The thought of a retailer going bankrupt will not be as prevalent as the customer themselves going broke.
Less will be spent overall and I think the table has already been set by the media that there will be a bargain extravaganza at retail this Holiday, which will in turn make already low margins lower.
Sure plays to Walmart’s and Costco’s strengths, though.
I don’t believe that what motivates gift card giving has anything to do with most consumers awareness of the credit market or a favorite retailers financial status.
People give purchase gift cards because they are convenient and offer the gifter the greatest degree of flexibility in satisfying the giftee’s needs (seasonal or otherwise).
It is possible that the total dollar value of gift cards may decline due to less disposable income but it isn’t likely, in my mind, that they will decline in prevalence. Some retailers, like Walmart, may even see a surge in number as well as volume due to their ability to “streeeetch” a dollar in gift terms.
Gift cards are IOUs…and in this frightening economic climate it wouldn’t be surprising if customers wanted to give something a little more reliable.
I agree with several of my colleagues.
(1) The shopper is not keenly aware of the financial conditions of any given retailer.
(2) The fact is that the amount spent is transparent and that the shopper is trying to pull back spending is a greater deterrent to the use of a gift card.
That, however, opens a great opportunity for a creative retailer. Sell the gift card at a 20% discount to enhance the value of the gift itself. Then make the gift card redeemable after January 1 to give some protection of a double discount on holiday merchandise.