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Minyan Mailbag - Gift Card Responses



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Gift Cards seem to be a hot topic out there these days. My earlier piece generated some great emails, posted below in order to advance the ball towards getting collective arms around the story:

From wise Minyan Rob Fraim:


Excellent thoughts in the column you wrote regarding the use of, and accounting for, gift cards. This is something I have been thinking about of late, and was just in the process of trying to get my mind wrapped around the "Which is better - sales now at higher margins or unredeemed gift cards?" question when your piece hit Minyanville.

And while the question to some degree remains unresolved -- given the lack of clarity by the retailers on how they are going to account for unredeemed cards, exactly what percentage pile up and gather dust, etc. -- you did a fine job in delineating the issues and bringing to the fore the significance of this matter.

I believe that the issue is going to become all the more important as time goes along since:

a) The retailers themselves are actively promoting the use of gift cards. Did you see the ads suggesting the "Why Shop? Just buy a gift card" approach. The fact that they are no longer simply passively offering them as a service, but instead are soliciting the sale of the cards makes it incumbent upon them to offer more complete disclosure as to accounting issues and such.

b) As part of the eat-take-out-buy-it-pre-packaged-we're-so-busy-whatever-will- save-me-some- time mindset that pervades our society, I would expect the use of gift cards - which are by definition a fast and non-taxing approach to gift-giving (although not too awfully sentimental and teardrop-inducing) - to continue rising. So not only the Christmas/Hanukkah season, but likely other gift occasions will also see a rising use of gift cards.

c) The use of gift cards is not confined to the bricks-and-mortar guys. You can also buy cards for eBay (EBAY), Amazon (AMZN), et al. Three of the most common things we heard about this retail's season were: Last minute shopping to get deals, the increased use of gift cards, and the relatively brisk business being done by online sellers of goods. While we all remember the laughable projections that were once made about the sales that were going to occur on the internet, there is no mistaking the fact that legitimate online commerce is real - and will become an even more important part of retail sales as time goes along. The convergence of increased gift card use and growing online retail commerce bodes for a looming big issue regarding gift card practices and accounting.

The use of gift cards is no longer incidental in nature. It is becoming a fundamental and elemental part of retailers' business practice. If they don't want to provide direction and guidance as to gift card practices and accounting it suggests that they either don't know what they're doing, or that they don't want us to know. Neither alternative is particularly reassuring.

(Note: If you'd like to get Rob's thoughts as well as daily observations from Indispensable Jeff Saut, Minyans are welcomed to email Rob here ( and ask to get on Rob's email list... you'll be in good company there!)

From Minyan Rick March:

Hi Jeff:

Since I have marketed Gift Cards as an addition of my near dead phone card business, I can say this: When the card is sold, the system (card issuer) immediately credits the merchant's account for the face value of the card less a transaction fee. Unless there is a specific product SKU for the card (there wasn't when I sold them to Elizabeth Arden 3 years ago) the sale shows up as an increase in CASH on the balance sheet.

Watch for inordinate increases in CASH positions of retailers, because that's where the sales of gift cards have shown up before.

Redemption rates are anywhere from 85 to 95 percent. That's some big coin that the retailers pocket. Most states escheat laws do not cover this "breakage" (industry term) and it is why retailers are loving the gift card so much.

All the best,

Finally, from Minyan Jim:


Nice work on the gift cards.

From what I see, gift cards also have another negative for retailers. Rather than purely being an incremental sale as a Christmas gift, people use them to buy their daily essentials such as groceries, clothing, etc. that they would have purchased anyway.

Many people I know received gift cards for restaurants that they like to patronize. They would likely go to the restaurant regardless. Rather than pay with cash or a credit card, they will pay with the gift card.

My point is that the explosion of gift cards may be just another way of giving someone cash for Christmas. To the extent that a gift card is used at Wal-Mart (WMT) to purchase milk, I don't think that is an incremental sale to Wal Mart. It's merely a payment method.

I think we will see retailers with weaker than expected numbers try to confuse the market by calculating a pro forma same store sales number after including gift card sales. It will be interesting if the market buys into this con job.

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