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Gift card industry is huge, $110B in 2012

Consultant's Mind

Gift cards are everywhere

ABC News recently said that gift cards are the #1 requested holiday gift items for 6 years in a row. This year, I gave out 2 gift cards; they are sold in grocery stores, easy to buy, more thoughtful than cash, and definitely useful. No one complained.

$110 billion of gift cards

I knew gift cards were ubiquitous, but I had no idea what a big business they were. The Corporate Executive Board notes that it will be $110 billion in sales in 2012, with more than 276 million people exchanging gift cards in the US. My math is not great, but that is basically 80%+ of all Americans either buying or giving a card.

Gift Card Market SizeGifting is an imperfect science

I enjoy giving and receiving gifts. Don’t get me wrong, Christmas morning is awesome. And yet, we should all agree that it’s hard to give good  gifts. A lot of the time we don’t know what someone wants, and on the other side of the transaction, a lot of the time we get things we don’t want.

Economists are anti-gifting

In general, they argue that gifting wastes time. The buyer spends time driving around, guessing what people want, comparing prices, choosing color and styles, standing in line, and wrapping gifts. What’s worse, the receiver may not use the gift, or waste even more time returning it for something else. Some funny podcasts on the topic from “Grinch-like” economists here:

Gift cards are flexible

Economists probably approve of gift cards because they offer more choices than a physical gift. Less transaction costs. Open gift cards (American Express, Visa, Discover) are just like cash and merchant cards like Costco or Wal-Mart give you tons on choices. In the past, if you didn’t like the gift card, you had to re-gift it to someone else, or sell it on eBay.

Secondary market in gift cards

Now there are other choices. A few websites have sprouted up over the last few years which allow you to buy and sell your gift cards at a discount. They are like “market makers” in securities who buy / sell stock. They hold the stock for a short amount of time, and also make money on the “spread” between the buying and the selling price. You see this at the foreign exchange counters at airports.

Market maker makes the money

The terms may vary (e.g., some provide refunds, some do not), but the process is the same.

  1. People sell their gift cards at a big discount from face value
  2. The market maker buys up inventory, marks up the gift card, and keeps the “spread”
  3. The buyer buys the used gift card a little discount from face value

There are good margins

Looking at Plastic Jungle (12/29), they were buying J Crew gift cards at a 21% discount and then re-selling them at a 10% discount to face value. They are pocketing a 11% spread in the middle.  Not too shabby.

Discounts vary by retailer

The discounts vary considerably by retailer. Specialty retailers tend to have a smaller inventory of gift cards and deeper discounts (e.g., Surf Wear PAC SUN shows a 25% discount). Super popular retailers (e.g., Wal-Mart, Apple) have discounts of less than 3%.  See a sample of discounts offered.

Great way to save

Not everyone is into Groupon, Living Social and other forms of coupons.  However, for those who have a large purchase planned in the next few months, it might be worth looking into. A 7% discount on a Home Depot gift card for a $2,000 kitchen renovation will add up quickly. It’s also a good way to monetize any useless gift cards roaming around your house.

Don’t let gift cards go to waste

At the very least, don’t be one of the many people who either lose their gift cards or do not spend the remaining value. The retail industry calls it “spillage” and it is expected to be $1.7 billion this year. To me, that sounds like $1.7 billion in sales that have almost no costs.  To me, that sounds like retailer profit.

Post-script: The Federal Trade Commission gives some advice on gift cards here.

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