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Scrooged by gift cards? Try better management

Mike Duff

DSNRT NATIONWIDE REPORT -- Gift card sales are changing the face of shopping, particularly holiday shopping, but their impact isn't going to be entirely pleasant unless retailers develop methods to direct how consumers redeem them. Retailers also should be aware that competition to gift cards is gathering.

With consumers turning somewhat more adventurous, entertainment, travel and restaurant gift certificates may take dollars away from purchases of apparel, home goods and groceries.

Such competition puts pressure on retailers to sweeten the gift card deal. Target, Circuit City and Sears, among others, ran promotions offering gift cards in return for specific purchases, such as for tires.

According to a Gift Card Survey conducted for the National Retail Federation (NRF) by BIGresearch, 69.9% planned to buy gift cards during the past holiday season, spending an average of $34.24 per card. The surge in card sales coincide with a growth in acceptance, as 48.4% of consumers in the survey said they would like to receive gift cards versus 41.3% in a survey last year.

While the results on the latest holiday season aren't in yet, the NRF study indicated that consumers would plan to spend about $17.24 billion on gift cards during the period, or about 8% of predicted holiday sales. The NRF study predicted that consumers would on average buy 3.34 gifts cards and spend $114.44 for them..

In a research note, Deborah Weinswig, a Citibank Smith Barney analyst, said the combination of gift cards and certificates could wind up representing about 10% of holiday sales.

Yet that wasn't going to be accomplished without some controversy. Early in the holiday season, news reports warned consumers to beware of gift cards, as some came with depreciation schedules and expiration dates. While smaller retailers who use third-party companies to operate their gift card operations issue many such cards, several major retailers decided last year to change their policies to make gift cards more consumer-friendly.

Sears announced in mid-December that it was eliminating gift card expiration dates on all gift cards purchased on or after Dec. 17, 2003. Previously, Sears gift cards expired two years from the date of purchase.

"Gift cards [were] very popular this holiday season, and now there is another reason for Sears shoppers to purchase a gift card for family and friends," said Kris Crow, vp of Sears customer relationship management.

One of the reasons JCPenney decided to end gift-card depreciation was to make its policy uniform, said Tim Lyons, a JCPenney spokesperson. Several states have laws on their books prohibiting gift card depreciation or expiration, he noted, and managing a system that had different rules in different localities became unduly burdensome, he said.

"More often than not, customers will spend more than the value of the card when they redeem it," he noted. "They think, 'This gets me more than half way to the price of that blazer.'" And, of course, loyal shoppers who give gift cards rather than cash or bank or credit card gift certificates, such as through American Express, will drive many more consumers to their preferred store.

"Gift cards ensure continued traffic from the holiday season," said Ellen Tolley, a NRF spokeswoman. "It's encouraging for retailers to consider that thousands, if not millions, of gift cards are circulated and redeemed in the slowest month of year."

Still, the shift in purchasing will have a significant impact on holiday results for many retailers, particularly until any spending shift cycles through and no longer effects year-to-year results. In some cases, retailers are offering specialized promotions and merchandising for the immediate post-Holiday rush to keep gift card redemption within the holiday framework.

Weinswig said her analysis indicated that about 10% of gift card values would be redeemed in the week after Christmas, with 70% being redeemed by the end of January. Post-Christmas retail promotions should help offset the negative impact of any gift-card-related sales shift, she said. "We believe retailers are merchandising the stores for the week after Christmas, so they have adequately prepared for the gift-card impact."

That said, not all major retailers are instituting post-Christmas programs around gift cards. "We really don't have any sort of promotions planned or additional signing," said WalMart spokeswoman Danette Thompson. "They're on display for purchase. We call them out in the circular. But beyond that, there is no additional promotion as far as inciting customers use them before the end of year."

Joan Storms, a Webush Morgan analyst, noted that gift cards could impact retailer yearend numbers in several ways, even putting a damper on critical year-end comps. However, multi-channel retailers could develop strategies to drive sales toward targeted operations. Such a strategies may potentially generate sales from non-customers. They also can introduce potential customers to a retailer's charms. In the case of retailers who only have a store or two in a given market or who are about to enter a new area, gift cards might induce revenues that they otherwise would lose and even enhance word-of-mouth marketing strategies.

Even in the case of consumers shifting holiday purchases to the January time frame, a gift card provides potential opportunities. "What if you could use it to train customers to be less promotional in buying after Christmas? If you know they're going to spend anyway, you don't have to mark down as much," Storms said.

The NRF study suggests that retailers could use gift cards to better address the preferences of specific demographics. Consumers 65 and older said they planned to buy, on average, 3.9 cards, spending $130.62. Consumers aged 55 to 64 planned to purchase an average of 3.61 cards, spending $134.80. In regards to gender, men planned to spend $120.57 each on gift cards while women anticipated spending $109.23.

Eventually, retailers are going to have to work out how to meet the several challenges that gift cards present. "In the meantime, it may play some havoc with the numbers," she said.

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