Gift card programs become more creative, lucrative

From November 2007

By Patricia A. Murphy

Credit card usage may be maxing out as more Americans reach into their wallets for alternatives like gift and other pre-paid card products. Indeed, gift cards are fast becoming a mainstay of the payments landscape.

Javelin Strategy & Research, a San Francisco-based financial services research firm, predicts that within five years 30 percent of Americans will be using alternatives to traditional credit cards -- gift and other types of pre-paid cards -- for purchases at online stores. That’s up from an estimated 14 percent of online transactions this year.

“Although it took nearly a decade for alternative payment methods to secure their position in the online world, it’s apparent that everyday consumers are ready to view them as a trusted and viable way to buy online,” says Bruce Cundiff, senior analyst at Javelin. “Given the recent online surge, we expect to see some of these trends transfer to offline buying over time.”

What will this mean for the upcoming holiday buying season? Whopping year-over-year increases in gift card purchases, if predictions from Stamford, Conn.-based Archstone Consulting prove accurate. Based on responses to its 2007 Holiday Gift Card Survey, Archstone projects purchases will reach $35 billion this holiday season; consumers spent $24.81 billion on holiday gift cards last year, according to NRF’s 2006 Gift Card Survey (results of NRF’s 2007 Gift Card Survey will be released November 13).

The Archstone survey, which queried a cross section of web shoppers, also reveals that approximately 56 percent of all holiday gift cards will be redeemed within a month of receipt. Therefore, “retailers that alter first-quarter pricing strategies to take advantage of the prevalence of gift cards will capture more margin in January, traditionally a month of clearance markdowns,” says Michael Unger, director of Archstone’s consumer products and retail practice.

While data varies by industry, experts agree that gift cards drive merchant revenues, allowing retailers “to get a boost in holiday sales and extend the season,” says Jane Cannon, chief technology officer at MICROS-Retail, which provides POS and related technologies to retailers.

Retailers as aggregators
Many retailers are opting to become aggregators – selling gift cards branded by other retailers and earning a commission on each card sold. “Gift cards represent a nice chunk of change for third-party aggregators,” says Doug Dwyre, senior vice president for pre-paid and loyalty products at First Data.

On the spend side, First Data research indicates that gift card recipients spend, on average, 30 percent more than the value on the cards gifted them.

In addition to the basic technological underpinnings, First Data supports clients with extensive merchandising and marketing support. “Retailers are becoming a lot more strategic about gift cards,” Dwyre says. They’re not just looking for plain vanilla programs. “Those who are most successful are the ones who merchandise and promote these programs.”

Case in point: Giant Eagle. Bill Ruehl fancies himself quite the bargain shopper, but even he was astonished when a recent spending spree at his Frederick, Md., supermarket translated into big savings the next time he went in for a gasoline fill-up.

“I was able to purchase $80 worth of gas at a cost to me of about $15,” he boasts.

The savings accrued from fuelperks!, a program that rewards users of the Giant Eagle Advantage Card with 10-cents-per-gallon fuel credits for every $50 a cardholder spends at Giant Eagle supermarkets and GetGo convenience stores.

Ruehl says he was able to pile up the perks over the course of about two weeks by purchasing Home Depot and restaurant gift cards at his local Giant Eagle.

Programs like these make the loyalty card “an even more powerful tool for retailers,” Cannon says.