Money & Work
The Gift Giving Retailers Less
As consumers get wise and states crack down, stores are enjoying fewer windfall profits from unused gift cards forgotten in the back of the drawer
bconway@gmail.com
American retailers are losing one of their biggest cash cows of the decade: lost, expired or otherwise unused gift cards.
U.S. consumers left nearly $10 billion in gift cards on the table in 2007, or about 10 percent of card purchases, according to Needham, MA-based market research firm Tower Group. That turned the $94 billion in 2007 U.S. retail gift-card purchases into a kind of windfall profit for U.S. retailers, via losses, expirations and so-called “dormancy fees,” under which the value of an unused card steadily dwindles.
And just as retailers face a tougher holiday season, consumers seem to be closing this loophole, aided by state legislation.
The National Retail Federation projects an 8 percent drop in gift-card sales – just one sign that consumers are on track to redeem a much larger share of their gifts.
“The 10% number has dropped significantly, due to consumer awareness and state legislation,” Tower research director Brian Riley said.
He predicted that about a third more of the gift card funds would be redeemed in 2008.
Nassim Sultan is one consumer heeding the message. The 27-year-old Washington, DC, iTunes enthusiast sounded almost wistful as he described the $50 gift card he received from his sister for Christmas a few years ago. He would have redeemed it, he said, except that he lost a confirmation code needed to activate the card. He never got any tunes.
So is Amy Bucher, an Ann Arbor, Mich., health-care researcher who recalls being perturbed as she noticed the dormancy fees on the gift cards her mother purchased at a Simons mall a last season. They would erode most of the card’s value within a year. That hardly seemed worth it.
These monthly or annual fees deducted from an unused card’s value have run increasingly into consumer-protection restrictions, as state lawmakers have responded to the objections of consumer advocacy groups.
Thirty-three states have enacted limits on expiration dates and dormancy fees, according to the National Conference of State Legislatures; 16 have banned dormancy fees, and California, Connecticut, Rhode Island and Washington have outlawed expiration dates.
Consumers may also redeem their cards faster this season out of fear the issuer could go bankrupt. Bankruptcy generally renders gift cards useless.
The accounting nomenclature for gift cards is “unsecured debt,” which tends to be sent to the back of the line when spoils are apportioned after a bankruptcy.
Some $62 million in outstanding gift cards to The Sharper Image were effectively nullified in February 2008, when the San Francisco-based gadget retailer declared bankruptcy.
A similar fate befell holders of cards to Linens-N-Things, which went under in May 2008. (The Clifton, N.J.-based retailer of bath and home goods did end up offering discounted redemptions.)
The advocacy group Consumers Union recently petitioned the Federal Trade Commission to declare holding gift-card funds in general accounts—where they may be distributed to creditors in a bankruptcy—to be an unfair and deceptive practice.
Unless prodded, most retailers have been slow to make the cards more consumer-friendly, or to protect cards in the event of a bankruptcy.
A number of calls to major retailers, including Banana Republic, Express and BestBuy, for comment on projections of declining card sales, were not returned. None of these stores has announced changes to this year’s gift card terms.
At an Express on Broadway in New York City, a sales associate who declined to be identified explained how the store plans to market cards this year: with nicer packaging.
“This thicker paper stock can be wrapped, or placed under a tree as is,” he said.
At least one retailer had a different idea: struggling gadget retailer Brookstone invited customers to redeem any other retailer’s gift cards, for a 15 percent discount on its own big-ticket items through Christmas.
Waited too long to use your gift cards? Maybe not, thanks to new legislation.