Connections for Success

 

12.05.11

Gift Card Crazy II: Holiday Edition

A friend of mine recently handed me a gift card that he had been holding in his wallet, unused, for almost a year.  He decided to give me the card knowing that it would never be used by him and that I would put it to good use. It seems that gift cards are the one gift just about everyone can expect to receive this holiday. As your restaurant tries to capitalize on the gift card frenzy, I thought the holidays would be a perfect time to refresh your memories on the pros, and cons, to using gift cards this season, following up on my original blog, Gift Card Crazy.

With Black Friday and the official start of the Holiday Season having passed, many of us will buy and receive gift cards within the coming weeks.  In fact, my wife called me last week while she was walking through the mall.  Her question was, “What should I get for your nephews and niece for the holidays?”  My reply was the typical, “I’m at work and I have no idea!”  She came home that night with gift cards to Sports Authority, Best Buy, Abercrombie and Target.  While there were no restaurant cards in that day’s purchase, the many pros and cons of gift card sales for retailers and restaurants are the same.

The obvious pros include:  the positive cash flow impact, increased sales, and the positive marketing opportunity.  The marketing opportunities can have huge impacts when gift cards are bought for gifts.  The business gets at least two touches — the purchaser and the receiver/user of the gift.  Additionally, the user of the gift card will often purchase more than the value of the gift card.  I certainly did when I used the gift card that my friend gave to me.

Another value usually seen as a pro, that can also be a con, is that a number of gift card recipients will never use the cards that they purchase or receive as gifts.  This unused portion of gift cards is referred to as breakage.  The pro – free cash flow for your business!  The con – if the card is never used by a user, especially a new one, that user has a much less chance of becoming a loyal, regular customer.  I prefer to refer to the cons of gift cards as the “challenges” that businesses endure in selling them.

A few of these challenges include:  accounting for the unredeemed cards, accounting for incentive and loyalty programs associated with gift cards, tax recognition rules and the varying state regulations of gift cards.  The accounting becomes a challenge because cards are often sold in large volume and small denominations.  The accounting rules governed by Generally Accepted Accounting Principles differ from the tax recognition rules.  Oh no, two sets of books!  In addition, just about each state in the United States has its own unique statutes, legislation and rules that regulate certain aspects of gift card administration.

I am a believer that the pros certainly outweigh the challenges in most situations but, if your business plans on offering gift cards, be sure to do your homework as you sell, sell, sell this Holiday Season.  And if you have any questions, I am always here to help.

Happy Holidays from ORBA!

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