Gift Cards

Tis the Season for Gift Cards

Gift cards are taking on an important new role for retailers this year: luring customers into stores without incurring the deep discounts of last year. Some are adding special services or features, while all are using the cards as promotions to attract shoppers during the holiday season, instead of historically driving sales after Christmas. Retailers are betting shoppers will spend more than the value of the card. People want things to be free, but will consider going back for more. On average, recipients spend 40% more than the card value, according to Dan Horne, a professor of marketing at Providence College who studies gift card trends. It will be interesting to see if gift cards become a major factor this holiday season.

Winning Over Reluctant Shoppers

Small shops that rely on seasonal sales are seeking creative ways to avoid last year's heavy discounting, as cash-strapped consumers are expected to gravitate toward big-box and discount retailers. Small shops have to worry that penny-pinching consumers will go elsewhere, experts say. Customers have "shifted a lot of their spending away from the specialty retailers and moved toward mass value centers like Wal-Mart," says Frank Badillo, senior economist at Retail Forward, a research and consulting firm specializing in the retail industry.

The big retailers are stepping up to the plate this year with more than the usual low-cost holiday gift offerings. Luxury retailer Neiman Marcus is giving free $50 cards to shoppers, while Saks is giving away cards to online shoppers. Target will be handing out $10 cards to those who spend at least $100 by Black Friday. They even have created $25 cards that double as toys. Best Buy is allowing multiple gift-givers to contribute to a single card to cover big-ticket items.

To divert traffic from mass retailers, some brick-and-mortar shops are trying new tactics such as tapping into online comparison-shopping sites. Jack Parish, chief executive of The Doll Hospital and Toy Soldier Shop, a specialty toy store in Detroit, uploaded 15,000 toys into Google's free product search, Google Base in October. Online sales in the first half of October were up 15% from a year earlier. He has also included a section on the site that compares the cost of items with gift wrapping, taxes and shipping to major competitors, as a way to edge out some of the big-box competition.

Toy and gift shop Groovy in Washington D.C. rolled out its holiday merchandise in early October - a full month earlier than usual - advertising Halloween and Christmas simultaneously. "We said, let's get the inventory out while there's money available," says co-owner Manuel Cortes. Wonder Works, a specialty toy store in South Carolina, set up its Christmas windows in mid-September, a month and half earlier than usual and began offering layaway a few weeks earlier too. Owner Christine Osborne says 45% of business comes between October and the end of the year. Her strategy seems to be already working - September sales at the toy stores were up 8.5% from last year. "People are anxious and want to get items while still budgeting out their money," she says.

Retailers, small and large alike, are also being smarter about their inventory so they don't get stuck heavily discounting leftover merchandise like they did last Christmas. After over-ordering by at least 20% last year and having to discount items as much as 80% off, Mickey Gee, owner of the Pants Store in Alabama, reevaluated his merchandise this year. He took a closer look at his customers' demographics to ensure that any new inventory would tap into their needs. For example, he ordered more Columbia, Levi and Wrangler brands for his rural market where those brands sell well.

Raising Funds

In this slow economy, if you’re in a bind and neither credit nor loans are an option, boosting your company’s cash flow through gift cards can help bail you out. Just ask day-spa owner Eva Sztupka-Kerschbaumer, who says she recently raised $30,000 in a single day. Her Pittsburgh firm needed a quick cash infusion when $14,000 worth of equiptment conked out. However, the last thing she wanted to accrue was interest charges, so she didn’t go to a bank to raise funds. She wanted to avoid missing out on future profits, by partnering with a factoring company, which provides cash up front in return for a cut of her company’s future receipts.

Instead, she presold her spa’s services at a discount. She sent an email to her list of 8,000 subscribers and offered them a free matching gift card on the purchase of at least $500. The advantage was clear. “This way I lock in my customer base, purchase equipment quickly and get the cash flow,” Sztupka-Kerschbaumer says.

Another way to reel in cash fast is non-linear pricing - charging a higher price upfront with the promise of a discount or freebie down the road. This method invokes the same basic idea as the spa’s gift cards: using the customer’s affinity for a deal to guarantee future business. An example is an open plane ticket pass that is costly upfront but becomes less expensive with more use. Customers like this strategy because a product or service becomes less expensive as they use it more and businesses like it because they get cash up front. By charging a fee before services have been rendered, you’re able to apply that cash to growing your business — or just keeping it afloat.

Discount with Balance

Selectively discounting products or services can be more lucrative than offering a blanket discount on all your firm’s entire catalog. Consider a restaurant discount promotion. A buy-one-get-one-free coupon without limits might be redeemed on a really busy day, overburdening the staff. Or worse, a restaurant might have to turn away customers who would have paid full price. Instead, add some reasonable restrictions to your discounts. For instance, require a minimum purchase or specify slower times or days when discounts can be used. Keep in mind that some gift cards will never be redeemed. As much as 10% of the gift card dollars bought each year are never used, according to TowerGroup, a financial consulting firm. This provides a nice cushion, especially if your offers were popular.

Nonfrivolous Gifts

When it comes time for gift giving, it’s never a good idea to skimp on clients or top-performing employees, bare in mind that these times merit more subdued gifts. Providing discounts or gift cards for the company's products or services in lieu of expensive gift baskets or monogrammed letter openers may be more valued gifts. “If your employees are living paycheck to paycheck and you give them a box of chocolates to show your appreciation, expect some employees to chafe,” says Paul J. Rauseo, managing director of George S. May, a small-business management consulting firm in Chicago. “These people are struggling to put gas in their tanks right now. The last thing they may need is chocolate.” A thoughtful gift that most will appreciate and respond to is the opportunity for charity. You can purchase gift cards that allow employees to choose which charity to donate to. Visit web sites like GlobalGiving, TisBest and Charity Gift Certificates, which offer prescreened lists of charities. Other organizations, such as Network for Good and JustGive, offer lists of more than one million federally registered nonprofit groups.

Sources: Dana Mattioli & Diana Ransom via
Elizabeth Holmes, Ann Zimmerman & Miguel Bustillo via The Wall Street Journal

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