The North American gift card category has become an industry unto itself, with hundreds of billions in revenue and an array of new business models springing up around it.
More and more people are buying gift cards as presents during the Christmas shopping season. It’s just simply easier for them to buy gifts for people.
“I think the operating premise behind the gift certificate was that this was a way of maybe showing more thoughtfulness than just putting cash in an envelope and giving it to a friend or family member. At least it seemed you had considered their interests or their potential needs,” he said.
“But the first gift card as we know it today, as near as I can trace it back, goes back to 1994 and U.S. luxury retailer Nieman Marcus actually rolling out a gift card with a payment structure around it, meaning you could use the card more or less like a credit card and of course since that time we’ve seen just about every business from the corner gas station to the grocery store employing a gift card strategy as well. The industry has just exploded.”
Stephens said for a retailer gift cards allow them to sell something to a consumer who may not really know what they really want because they’re buying for someone else. So it takes the guesswork out of gift giving for the consumer. It’s a convenience.
“And for the retailer it basically defers the need to relinquish inventory against that revenue. So I give you $100 today but it may be six months to a year before I redeem that gift card. So you’ve got that cash in hand months or potentially even years before you have to relinquish any inventory against it. So the business case is very strong,” he said.
“But there’s another piece to this that I think sometimes comes as a surprise to consumers and that is about 10 to 20 per cent of gift cards that are sold never get spent. They never get redeemed. Or maybe they get partially redeemed. You leave a little bit of money on the card and then throw it in the garbage.
“So from a retail standpoint that’s a huge pick up for retailers. You’re selling $100 worth of goods and you’re maybe giving up $80 worth of merchandise at retail. That’s a pretty sweet deal for retailers. So the business case is strong.”
Stephens said there are a few things that are worthwhile for consumers to think about as they’re going out and purchasing gift cards.
“Number one you want to look to see if there are any restrictions on what the card can actually be used for. Are there any categories of goods and services that are somehow excluded from the use of the card? That’s something obviously you want to be sure of before you give it to someone,” he said.
“The other thing you want to look for are any hidden fees. And for most gift cards there are no such fees but if you’re giving say a pre-paid credit card that can be used anywhere very often you’re going to find that there’s an activation fee and it can be fairly substantial. So your $100 gift card may only wind up giving the recipient $85 worth of spending power once that activation fee is taken off.
“Last but not least is the expiry issue. The legislation within the province of Ontario anyway suggests that gift cards cannot have an expiry. However there are some exceptions notably things like manicures, spas, massage, that sort of thing. Those categories are for whatever reason allowed to expire their gift cards. Just pay attention. If in doubt, go to your local provincial legislation and see what it says.”
Stephens said the revenue on gift cards in Canada is about $3.5 billion and it’s growing at a compounded rate of about five to eight per cent.
“If I’m not mistaken that’s probably about double what retail is growing at and in fact it might even be more than that because I suspect 2023 was a relatively flat year for growth when you strip out inflation. It’s a significant category. It’s kind of become an industry unto itself,” he said.