When is the last time you received a Starbucks gift card? I’ve received them as holiday gifts, and I’ve given them to sales reps as thank you gifts. Starbucks gift cards, like their shops, are ubiquitous. They are almost as popular as gift cards from our nemesis: Amazon.com. Just about every month, a company offers me an Amazon gift card if I sign up for a service. WBGO, the local, Newark-based, non-profit radio station known for jazz, recently offered me an Amazon gift card if I donated. I called the station and complained that Amazon was bad for local businesses, and as a local radio station they should be supporting local businesses. The station manager asked me to suggest another entity’s gift card that he could distribute with national reach that support local shops. I was at a loss for words.
Each year, about $1 trillion in gift cards are issued, according to Mercator Advisory Group. These cards come in handy to shoppers when items are out of stock due to supply chain issues, or when gift registrants aren’t sure what they’d like. Yes, a sliver of that $1 trillion is our bridal market. Bridge retailers issue thousands of gift cards to our registrants each year. Just how much in gift cards do our stores issue? Let’s imagine that Bridge helps its stores sell about $20m a year and eighty-five percent of that is gift registry related. That’s $17m in registry sales. Let’s imagine that half of these sales are given in the form of a gift card. Our stores are giving out $8.5m in registry credit (gift cards) each year. And this credit piles up. Unless the credit is redeemed, the registry credit a store holds for customers builds up each year, which in accounting is considered a liability.
Many gift cards and registry credits are ‘closed loop'—aka they can only be used at a specific store. ‘Open loop’ cards can be used at a variety of stores. Most of our retail clients have one or two locations, which makes their closed loop card unappealing. William-Wayne & Co., a lovely store and my first client, has two Manhattan locations. In contrast, Walmart has 10,500 locations. (According to Walmart, 90% of Americans live within 10 miles of a Walmart store—which makes that gift card especially useful.)
Whether it's $1 trillion or $8.5m, this is a loan to the gift card issuers. They receive the money interest free until the cards or credit is redeemed. A store told me a registrant came in with her two- and four-year-old children to redeem her bridal credit. She had waited four years to redeem it. What a great deal for the store. Meanwhile, with inflation, the shopper may receive less for her money. Let’s imagine she registered for our best-seller, a Juliska Berry & Thread Whitewash Dinner Plate. Using our new Product History feature, you can see it has gone up 10% in the last 2 years. If she had a $3,000 registry credit, it may be worth just $2,700 in today's dollars.
And, it gets better for the store. More than 10% of gift cards won’t be redeemed, which the industry calls ‘breakage’. (What a misnomer; I’d call it "profit construction.”) In his article in The Wall St. Journal, Spencer Jakab shares that Starbucks estimates $181.m of issued gift cards won't be redeemed because they’re lost. Considering its total liability for gifts cards is $1.95b, that’s 9% of foam that Starbucks slurps off the top. Note: bean counters only write off what they know is lost. I imagine breakage is likely double that. If you’re Amazon, which has $2.5b in outstanding gift cards, 10% breakage is about $200m in smiley boxes you can skip delivering. Yet, it could be worse: your card could lose 100% of its value. A few years ago, Borders went bankrupt and $210m in gift cards went poof. Customers were left holding plastic bookmarks.
One may assume that stores don’t want a customer to redeem a gift card and prefer they lose it. Well, a survey by Blackhawk shares that 41% of customers plan to spend at least $50 more than the value of the gift card. That’s right, stores win both ways: they win because 10% of cards won’t be redeemed, and they win because shoppers may spend $50 more when redeeming the card. In other words, gift cards are a gift to: stores.
The outstanding benefits of gift cards lead us to ask: how can Bridge issue more gift cards--and gift credit? I believe that our stores can boost sales by offering discounts of up to 10% off gift cards because 10% won’t be used. Since a shopper will likely spend $50 more, our stores can offer bonuses up to $24.50 or more when selling a gift card.
We may also wish to update the default amounts in our incentive programs. When a person opens a gift registry at a Bridge Store, by default our software suggests the store offer a $30 gift card. This is likely too little. When a high-end gift shop gives out $30, it's hard for a shopper to spend that little and that amount won't drive the shopper into the store. We can see this play out in other industries. According to Mr. Jakab’s article, a $25 gift card at Bob’s furniture has a resale value of just $13.75. No sofa costs $25. That amount won't get a customer close to the door. Walmart has 10,000 locations and thousands of items under $25, and its $25 card therefore resells for $21.38. Based on these statistics, I think Bridge's default new registry bonus should be increased from $30 to $60. We have to get the registrant in the store's door. Plus, we know from past research that each registry brings in more than $1,100+ in online sales.
To take advantage of the trends in gift cards, stores should seek to give out credit for purchases completed. On prospective purchases where the store has not received any of the customer’s money, the store should keep in mind that customers often spend more than the card’s value.
I recommend stores find reasons to give out small gift cards, including giving out gift cards for one's birthday or anniversary. Imagine one receiving a free birthday gift card for $50 from the Ivy House in Dallas. One walks into the store and spends $500 on a set of Baccarat martini glasses. The store makes a nice profit. If one wishes to ensure the highest return, I’d make the gift cards redeemable in-store only.
Friends and family are not the only ones that deserve to be appreciated. Employees work hard. Let’s imagine a store has 10 employees and gives them gift cards. Only nine will likely redeem them, and the ones that do will likely spend more than the card’s value.
Speaking of gift cards for employees, I have an embarrassing story. A few years ago, a regional New England airline ordered gift cards for their ten employees for the Christmas holiday. They bought ten $50 gift cards that could be redeemed for my Air Wear travel products on my website (http://www.myairportcode.com/). At the time of order, I was worried about the employees flocking to redeem the gift cards and even issues with the same credit being redeemed twice. To prevent this, I ensured each gift card was numbered and unique. Then, I mailed the cards and sat back waiting for the rush. One card was redeemed. I should’ve been happy: they paid me $500 up-front and I gave out $50. This was the ultimate profit, but as an artist my ego was bruised.
Gift cards are in this sweet spot of customer satisfaction and profit. A store can give away 10% more and look like a hero.
And what about good ol’ fashion cash? We recently chatted about adding a new feature to Bridge Stores. On a store’s website, we could allow friends and family to gift cash instead of a gift card. The bride could cash out minus a small fee, say 3%. At first glance, some people would consider the gift card a better deal because the registrant receives 100% of the value. But remember, we know that 10% of gift cards aren't redeemed and most recipients spend $50 more. So the cash gift is actually 7% better (10% - 7%), and likely $50 better for the recipient. For the gift giver and receiver, cash is often better than a gift card.
People think giving cash is gauche. I’d remind them that people’s desire to seem prim and proper helped Starbucks garner a $181m windfall. Gift givers and receivers lost $181m. CEO Howard Schultz was the gift recipient. If one has second thoughts about giving cash, I’d just include a sappy note (and this rant?) with the greenbacks.
Currently, there is no national entity that offers a gift card where one can shop locally. The two concepts seem to be at odds: global reach with local impact. When we launch ShopLocal.org’s D2C marketplace, I plan to have a solution for that WBGO station manager: one can give a gift card from anywhere in the country that helps local shops.
Gifts surely have a purpose in life. The issue is the gift card is the weak link. It’s ripe for loss and neglect. The next time one wants to give a Starbucks gift card, skip the card and give cash. Or, better yet, meet the person. That’s the only way to ensure both people get the value they intended. The $25 one spends will have much more value on account of the conversation and good memories they experience together. That’s the best gift.