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Gift card sales during the weekend after Thanksgiving suggest consumers are shying away from closed-loop gift cards and are focusing instead on giving clothes and other merchandise as gifts during the holidays.
Purchases of merchants' proprietary gift cards during the weekend were down compared with the same weekend last year, suggest the results of a survey the National Retail Federation commissioned. Asked about their shopping for that weekend, 18.7% of respondents said they purchased a gift card, down from 21% who said they did so in a similar survey last year.
BIGresearch LLC, a market-research firm based in Worthington, Ohio, conducted the survey of 3,370 consumers from Nov. 27 to Nov. 29.
Total gift card sales for the 2008 holiday season will be down 9%, to $88.4 billion from roughly $97 billion in 2007, predicts a report released Nov. 18 by TowerGroup Inc., a research firm owned by MasterCard Advisors. Sales of merchants' closed-loop gift cards will drop 14%, to $59.9 billion from $70 billion, TowerGroup predicts. Sales of open-loop cards supported by national card brands, however, will grow 6%, to $28.5 billion from $27 billion, TowerGroup predicts.
The drop in closed-loop gift card sales follows announcements of several retailer bankruptcy filings and a greater consumer desire to give more practical gifts, says Brian Riley, TowerGroup research director, bank cards.
"On the private-label side, you are seeing some apprehension because there have been some sizable failures this year," Riley says.
Among the merchants filing for bankruptcy protection recently include Sharper Image Corp., Linens 'n Things Inc., and Circuit City Stores Inc. While Circuit City was granted permission by the court to honor its gift cards, Sharper Image stopped honoring its cards when it first declare bankruptcy, then sought permission to honor them. Finally, after allowing consumers to redeem a gift card if they made a purchase that was double the amount of the card, the company stopped honoring the cards again.
When failed retailers stop honoring their gift cards, and bankruptcy courts treat gift cardholders like other debtors who must wait to be repaid, if they are repaid at all, consumers become more skittish about buying retailers' gift cards, Riley says.
"Not a lot of good precedents have been set," Riley says. Gift cards "can get lost in bankruptcy filings pretty easily," he says.
Consumers should redeem gift cards quickly because other retailers likely will go into bankruptcy protection if holiday retail sales are poor and the economy declines further, Riley says.
The gift card industry as a whole is likely to suffer along with the retailers if more consumers get burned by bankruptcies and become skeptical of gift cards, he says.
"If there are more failures and sizable losses, and many people are affected, there is going to be a downturn in the industry," Riley says.
A survey conducted in October of 1,000 U.S. consumers by Illuminas Ltd., a marketing-consulting firm, found that 47% of respondents intended to spend less on gifts this holiday season.
They plan to spend their shopping dollars on practical gifts such as clothes, says Robert Takacs, managing director in the New York office of London-based Illuminas Ltd. Half of the consumers surveyed plan to purchase gift cards for such items as groceries and gasoline, according to Illuminas.
"Those retailers that can offer those kinds of options are going to attract those kinds of consumers right now," Takacs says.
Consumers worried about the economy may provide a bright point for open-loop prepaid cards, according to TowerGroup. Other research suggests consumers plan to use open-loop gift cards to stick to their budgets.
Indeed, 80% of respondents to a survey conducted by the Network Branded Prepaid Card Association said open-loop gift cards make it easier to stick to their holiday budgets. The Montvale, N.J.-based trade group represents issuers and processors of open-loop prepaid cards and the networks whose brands appear on them.
The associated conducted an online survey of 1,000 adults in October. The association released the results Nov. 18.
The survey found that 17% of consumers planned to give more network-branded cards than they had historically, 43% planned to give the same number, and 22% planned to give fewer network-branded cards. This is the first year the association has commissioned this survey.
Retailer bankruptcies have made consumers more wary of buying merchant gift cards, and economic troubles make consumer more interested in the flexibility to spend open-loop cards for such necessities as groceries and gas, says Juli Spottiswood, chair of the association's Media and Consumer Education Working Group.
"Buying a card as a gift that carries one of the networks on it and a bank name makes them feel more secure in light of some of the Chapter 11s," she says, referring to a form of bankruptcy protection.
Consumers likely will use the cards quickly for necessities, Spottiswood says.
"We'll see pretty quick usage of these cards simply because of customers' necessities," says Spottiswood, who also is CEO of Parago Inc., a Dallas-based loyalty marketing company.
Laws preventing expiration dates also will mean fewer funds will go unused because consumers will have time to redeem cards that they do not or cannot use for necessities, TowerGroup says.
Thirty-six states have put laws in place banning or restricting fees and expiration dates for closed-loop cards and requiring better policy disclosure. Unused card value will fall 20%, to $6.4 billion by the end of 2008, from $8 billion in 2007, TowerGroup says.
Though open-loop gift cards may bring consumers some comfort, that could change quickly if a bank holding the funds fails and cardholders lose their funds, Riley says.
While FDIC insurance does cover funds for open-loop gift cards, those funds may not be insured in the event of a bank failure because they could be held in a pooled account that exceeds the coverage limits. Coverage only extends to individual card holders if specific record-keeping requirements are met.
"We never thought we'd be seeing bank failures like we are seeing," Riley says. "There hasn't been a good test yet."
