Gift Card Sales Backfire: Implications for Retail Sector?

The whole idea of gift cards seems kind of silly. Why give someone a $50 gift card when it can only be used at one spot, while $50 in cash can be used anywhere? And if a person gives you a gift card back what's the point of it all?

Why not trade $50 bills and be done with it? Heck, why not save the effort and not exchange anything at all? I guess attitudes have not sufficiently evolved for that yet.

For whatever reason gift cards have become increasingly big business. People like them. Perhaps it's because they can buy whatever they want instead of having to go through the hassle of returning something too big, too small, too red, too blue, or too pink.

And Businesses like them too! Or at least they did.

Gift Cards Have Now Backfired

Consider the New York Times article Retailers Report Weak January Sales.

Here's a sign of how shaky the economy has become: Wal-Mart says its shoppers are redeeming their holiday gift cards for basic items -- pasta sauce, diapers, laundry detergent -- instead of iPods or DVDs.

On Thursday, the nation's retailers turned in their worst January in almost four decades as high gas and food prices, a slumping housing market, tighter credit and a tougher job market pushed consumers to the edge.

"Gift cards are being used as a secondary way to save," said Burt P. Flickinger III, managing director of the New York-based retail consulting firm Strategic Resource Group.

Shoppers appear to be looking at gift cards not as "free money" but rather as their "own personal cash," said C. Britt Beemer, chairman of America's Research Group, citing his recent surveys with consumers.

They're also holding on to the gift cards longer this year than last year, he said -- 15 percent of the 1,000 consumers his group interviewed said they redeemed their gift cards in December, compared with 33 percent who did so last year.

Retailer Same Store Results

• JC Penny (JCP) -1.9%
• Nordstrom (JWN) -6.6%
• Macy's (M) -7.1%
• Saks (SKS) +4.1%
• Target (TGT) -1.1%
• Wal-Mart (WMT) +.05%
• GAP (GAP) -2.0%
• Kohls (KHS) -8.3%
• Limited (LTD) -8.0%
• Costo (COST) +7.0%

"January's retail sales performance was the weakest for that month since at least 1970, when comparable records started."

Here's what happened this Christmas. Instead of buying sister Sue, brother John, or aunt Martha a sweater they did not want, you bought them a gift card. But they don't want anything now because they probably have all the junk they need. Or if they do want something, they would rather have something practical (a low margin item on sale later) instead of a high margin item right now.

Gift Cards Are Being Hoarded

• People prefer to have something later than now.
• So gift cards are being hoarded like money.
• Money is hoarded in deflationary times.

And so Social Attitudes About Debt And Money continue to evolve.

Time preferences from spending to saving are changing just as the Moral Obligations Of Walking Away are being hotly debated. This is not happenstance. And with Jobs Contracting, there is going to be a certain amount of forced cutback in spending as well.

Cisco Affected By Attitudes

Even tech bellweather Cisco (CSCO) is affected by attitudes. On the latest conference call Cisco Chief Executive Officer John Chambers said "I think we are actually talking ourselves into this slowdown."

Professor Depew picked this story up nicely in point number 4 of Thursday's "Five Things".

We'll simply point out that, in a sense, Chambers is right: we are talking ourselves into this slowdown. The question is, why? Because, that's what happens in every slowdown.

Remember, social mood drives social action; social action does not drive social mood. This is counterintuitive, but a negative social mood de-motivates people to produce more, purchase more and behave generally in an upbeat manner. A positive social mood, on the other hand, motivates people to produce more, spend more, take on more credit and expand businesses.

Deflation Starts Out As An Attitude Change

And changes in attitudes are now impossible to miss. Seeing changes in attitudes is one thing. Understanding the implications is another. Most do not yet grasp the implications. For that, we have been rewarded with the label "deflationista".

The origin of the term "deflationista" was discussed in great detail in the Bubble Economy Endgame. In response Professor Depew pinged me with this comment:

Great read Mish.
I'm proud to be a deflationista!
Maybe I should have some t-shirts printed up.
Cheers,
Kevin

And so he did. Following are some custom T-Shirts as depicted by Kevin in Rise of the Deflationistas .

Deflationistas do it for less.



Click Here To Order

Don't worry. It's well contained.



Click Here To Order

Prices are expected to drop. Delay your order now.

Comments

[huangjin]

I agree with everything except that the gift cards backfired. The money is sitting in the retailer's bank account collecting interest, instead of in the customer's bank account. If I was a retailer, I'd hope they never use the card.

[Lillama]

Interesting. Retailers love it when people hold on to their gift cards, because consumers often forget about them or lose them, and that certainly benefits the store. I think parents and grandparents like to give gift cards because cash can be used for drugs, alcohol, etc, so the gift card offers some control. It works well for gift-givers and businesses but not as well for consumers. I predict many of those saved cards will be lost, and while that's a shame, it's hardly a backfire for retailers.

[peetah]

Huangjin,
Even though the retailer may earn interest on funds from the gift cards, the interest earned is negligible at best. The earned interest is offset by other costs, i.e. cost to maintain gift card system, printing costs of plastics, etc. Furthermore, the "value" of the card is a receivable and can't be recorded as income until the card is used by the consumer. So a consumer holding onto a gift card indefinitely doesn't necessarily benefit the retailer all that much.

[peetah]

Huangjin,
Even though the retailer may earn interest on funds from the gift cards, the interest earned is negligible at best. The earned interest is offset by other costs, i.e. cost to maintain gift card system, printing costs of plastics, etc. Furthermore, the "value" of the card is a receivable and can't be recorded as income until the card is used by the consumer. So a consumer holding onto a gift card indefinitely doesn't necessarily benefit the retailer all that much.

[jcrash]

Peetah, HUH?
Sure, it doesn't benefit them at all - as long as you don't count improving their balance sheet and thus more than likely reducing the Cost of Capital.

I'll sell you gift cards all day if you promise to "hoard" them.