Study: Gift cards

Gift cards are taking retailers and consumers by storm, and are actually resulting in a shift of retail sales from one period to another, according to a new report that examines this new way to give.

For both consumers and retailers, gift cards are not the drab gift certificates of old. They are particularly attractive to younger recipients, due to their similarity in appearance to credit cards, and to older recipients who "have everything."

Their popularity was readily apparent in a recent survey of 80 of the nation's largest retailers. They represented just over 11,000 stores selling food, clothing, home furnishings, electronics and sporting goods.

During the Christmas season of 2003, just over one-half (53%) of these stores offered gift cards. Only a year later, during the 2004 Christmas season, this proportion had increased to two-thirds (68%).

Gift cards also appear to be the main contributors to a new phenomenon for retailers. Their usual drop-off in sales from December to January has started to moderate.

Strengthening sales in January may be partly a result of gift card redemptions during the month. That's because retailers do not record any actual sales until some or all of the value is redeemed by the card recipient.

Larger retailers more likely to offer gift cards

The concept of gift cards arrived first among retailers with a large infrastructure which supported their introduction. Such retailers generally have larger stores. Therefore, they account for a larger share of sales and more sales per store, even without considering the effect of gift cards.

Department stores were among the first to embrace the gift card idea. All department stores offered them in both 2003 and 2004. Coming close behind were home electronics and appliance stores, furniture stores and other general merchandise stores. They were followed at a distance by supermarkets and clothing stores.

On average, stores that introduced the cards had higher sales. For example, among those that introduced the cards in 2004, sales per store amounted to $9.4 million in 2003 and $10.0 million in 2004. (Sales per store for all retailers covered by the survey amounted to $8.3 million in 2004.)

In comparison, the group of stores that did not offer gift cards in either year had sales per store of only $3.3 million in 2004. For those that offered the cards in both years, sales per store amounted to $10.9 million in both years.

Gift cards likely were offered first by larger retailers with the resources to set up such programs on their own. It is only in the last year or so that third-party companies have appeared in Canada that will take on the management of such programs on behalf of a retailer, making it easier for smaller retailers to come on board.

Gift cards shift sales from period to period

Gift cards have the impact of shifting retail sales from one period to another. At the time they are purchased by the consumer, retailers record the value in their accounting system.

However, this is the key: Retailers do not record any actual sales until some or all of the value is redeemed by the card recipient.

This impact may be especially important in the pre- and post-Christmas holiday shopping season. Gift cards are reportedly purchased in large numbers in November or December and given as gifts at Christmas. But many are not redeemed until January or later.

This may have contributed to a new phenomenon for retailers. The usual drop-off in sales from December to January has started to moderate.

Sales in January 2003 were 40.3% below the 2002 monthly average. However, in January 2004, sales were 38.3% below the previous year monthly average, and in January 2005, they were 38.5% below the previous year monthly average. The strengthening sales in January may be partly a result of gift card redemptions during the month.

The impact of shifting sales can be seen to some extent in all groups. It is most pronounced and consistent in the group that introduced gift cards in 2004, which showed the most important strengthening in their 2005 January sales. It suggests that this group had the largest one-year impact from gift cards.

In recent years, month-to-month percentage change in sales for all retailers, seasonally adjusted, has been dropping off in December and rising in January.

Why retailers like gift cards

Gift cards are attractive to retailers for a number of reasons. First and foremost, research shows that a large percentage of consumers spend more than the original face value of their gift card. Many consumers spend nearly twice as much.

These cards often represent a reservoir of funds to the gift recipient, allowing the consumer to purchase something nicer than they might otherwise have done.

Gift cards have no value until loaded at the cash desk. As a result, they can be prominently displayed throughout the store, rather than stored in a drawer for security reasons, like their predecessor, the gift certificate.

They are also much harder to counterfeit. They are more flexible than gift certificates because they can be loaded for any amount the purchaser desires and many of them can be reloaded.

Because the cards are electronic, the retailer can better track their use, providing another source of data on their customers' purchasing habits.

Definitions, data sources and methods: survey numbers, including related surveys, 2406 and 5027.

The analytical article Gift Cards: A Win-win Way to Give (11-621-MIE2005029, free) is now available online in the Analysis in Brief series (11-621-MIE).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Monica Weise (613-951-3803), Distributive Trades Division.