Gift Cards a Favorite Among Retailers This Season

Wonder what the hot holiday present is this year? It's… plastic.

Gift cards — gift certificates in debit-card form — are becoming the It thing to give. They're growing so popular among retailers and consumers alike that the National Retail Federation  (search) predicts shoppers will spend about $17 billion on them this holiday season alone, and market research firm NPD (search) expects 21 percent of consumers, or 1 in 5, to buy a gift card this year.

"That represents a significant amount of their business," said NPD chief industry analyst Marshal Cohen. "Gift cards are on the rise. They're now something companies actually plan into their revenue stream."

Gift cards look like plastic credit cards and serve the same function as gift certificates used to. Americans will spend more than $40 billion this year on gift cards, up from about $13 billion five years ago.

And gift cards are the darlings of retailers because almost 20 percent of them don't get redeemed. Also, many gift card recipients who do use them wind up spending more than the value of the card, Cohen says.

"There is a theory that they generate some lift for the retailer," he said. "When I was in retail, I loved gift cards. I could make a $100 sale and $80 would get used but $20 wouldn't."

About 17.25 percent of retail holiday sales are expected to come from gift cards, a 5 percent increase over last year, according to NPD.

Cohen said a big growth sector in the gift card business is in the pampering or relaxation category, with cards to spas or yoga studios becoming more popular this season.

Starbucks Coffee Co. (SBUX) has two designs of holiday gift card this year and predicts card sales will be healthy this season. Since the company launched its gift card in 2001, there have been more than 100 million redemption transactions that have resulted in net sales of more than $400 million, according to spokeswoman Kristine Jimenez-Ortiz.

Jimenez-Ortiz said the Starbucks gift card business has seen a 30 percent increase from year to year; for fiscal year 2003, 10 percent of all company transactions were paid for with a gift card.

"We definitely have seen tremendous growth," she said. "Certainly over holiday periods we see increases."

Part of the sales spike, at least for Starbucks, comes from its "automatic reload" policy, allowing consumers to replenish gift cards' value and use them again. The average gift card the company sold in the fourth quarter of 2003 was for $15, but the average amount people spent to refill them was $25.

"A lot of our loyal customers reload money back onto the card and use it for their everyday purchases," said Jimenez-Ortiz.

Gift cards are a big business for other retail chains, too, including Barnes & Noble (BN), J. Crew, Blockbuster (BBI), Circuit City (CC), Banana Republic, Home Depot (HD) and Toys R Us (TOY), to name a few. Many restaurants and shopping malls also sell them.

But companies have come under fire recently for charging dormancy fees ranging from about $1 to $2.50 per month for gift cards that haven't been used within a certain amount of time — usually between 6 and 24 months — thus depleting their original value.

Toys R Us, for instance, charges $2 per month after 24 months; J. Crew takes $2.50 per month after the same amount of time. Barnes & Noble has been charging a monthly fee of $1.50 after 12 months of nonuse.

Lawmakers have lashed out against the practice, and corporations like Starbucks and Blockbuster have dropped their dormancy fee policies, Starbucks within the last few weeks and Blockbuster last summer. Most recently, Barnes & Noble also said it plans to discontinue charging the fees, though its Web site still reflects the old monthly dormancy charge policy.

Starbucks — which says it never actually charged any inactivity fees despite its old system allowing for them — is issuing new, no-expiration-date cards, but Blockbuster gift cards still expire after 24 months. Target (TGT) and Limited Brands (LTD) gift cards never had an expiration date or dormancy fees attached.

"I don't know how you could with a fair conscience be a retailer and maintain dormancy fees," Cohen said. "It doesn't look or feel good. Chances are, retailers will get rid of them before legislators even pass [a law against them]."

Dormancy fees aside, consumers are still snapping up gift cards because they seem more personal than cold, hard cash and are more portable and convenient than gift certificates. They're also usually eye-catchingly displayed near the register and in effect increase in value if used right after Christmas because of all the post-holiday sales.

"Consumers are very comfortable today with giving the gift of giving," Cohen said. "It makes shopping easier. Money takes zero thought. A gift card at least says you made an attempt to be thoughtful."