Why Gift Cards are Terrible (or Wonderful)

Gift Cards, that is, store-specific declining-balance electronic-payment cards have features that make them both attractive to the consumer and attractive to the retailer, but like a casino where the house always wins-- so too do the retailers ultimately win when you go and buy a gift card.

Did you know that approximately 12% of Gift Card value is never redeemed? In North America, on Gift Card sales of over $60bn, that equates to pure bottom line profit of over $6 Billion. --For what?

So that you can tell your brother or mother or daughter where to spend your money. If you just gave them CA$H, they could go and spend it however they like, but with a gift card you don't give them the thought of picking a book they like-- only the directive that they must buy a book.

So what about things like home improvement or grocery where, in all likelihood, they were going to spend cash anyway? You've now gone ahead and created a situation for the retailer where they can guarantee that income, recognize it in many tricky accounting and tax ways, and possibly even make more than your Gift Card recipient wanted to spend. (in the case of breakage)

Why are Gift Cards great for the retailer?

Breakage (Money that doesn't get spent)- You get a gift card from someone for $50 and go to the retailer and spend $47.50. They simply deduct it from your card and now you have a piece of plastic you have to carry around worth $2.50. You put it in a drawer, forget about it, lose it, whatever--- and now that $2.50 never gets spent. The retailer already has that whole $50. They've had it since the day the card was purchased, so they just have to stop recognizing $50 in liability, and recognize the sale you made. They know that there will be a certain industry standard for breakage, so they can even recognize that. As a consumer, the GC buyer is out $50, you only got $47.50 worth of 'value', and the store is laughing. But wait-- there's more:

Float (Time that they have the money)- So someone buys you a $100 GC in late November, as your Christmas present. The retailer now has their $100 in the bank, and they've got a piece plastic they're going to give you at xmas. You get it, and put it with all the others in your xmas pile and don't actually get around to spending it until March. So now the retailer has to give you some merchandise with face value of $100 in March. [in a roundabout way] They got to use your money to make money for four months-- and then they got to 'make' money (from the margin of the product you chose to redeem your GC for) on top of it. Imagine adding all that up and instead of $100, it's a few million. This retailer, even if it was just sitting in a savings account, got to make money off YOUR money, for four months, conceivably tens or hundreds of thousands of dollars.

BONUS- Non-dollar currency Gift Cards (Air Miles, Aeroplan Miles, Petro Points, Optimum Points, etc) What about if someone buys you a gift card in a non-dollar currency? There are many examples, and I've just named a few. Well now, there is the opportunity for yet another middle-man to slice off a piece. There is MARGIN built into any rewards currency, so in addition to breakage and float, think of it like an exchange rate. Imagine buying a US Gift Card in Canadian dollars--- everything is the same as before, except now you also get to pay a little exchange rate on the dollar. That's what happens with rewards currencies. A worst case scenario is someone buying you a gift card of a rewards currency (which has it's own breakage and float calculations) which you then redeem for -- a Gift Card to a retailer--- (again, with the same breakage and float mentioned above)---and then you spend that Gift Card on a high-margin item at that retailer.

Why not give Cash? Or even better-- ask them for a list of things in your price range, and purchase online, get free shipping, the best possible deal, and earn YOUR OWN rewards currency on the purchase (via a site like AirMilesShops.CA). This way, they get a present they want, you pay the absolute minimum, the retailer only gets what they deserve, and you get a treat on top. Also-- do all this shopping throughout the year, as not to overload your budget.

My next rant will be about the greeting card industry... $7 for a piece of paper and an envelope?