The country’s continuing economic downturn has created an atmosphere ripe for the one-stop shopping convenience of gift card malls.
“We find that people are saying, ‘I don’t want to go to the mall, I don’t want to be tempted, I don’t want to spend a lot of money or go over my budget. I want to spend $25 for this person, and $50 for that person — that’s all I want to do,'” says Teri Llach, vice president of Blackhawk Network Group, the largest provider of third-party gift cards in the United States and Canada, and a subsidiary of grocery-store chain Safeway.
The solution? Picking up gift cards for those on your shopping list at your local gift card “mall,” typically found at a kiosk within grocery, convenience or drug stores.
Less temptation, controlled spending
Jeanne Marra, a marketing communications professional and mother of three children in Mehlville, Mo., loves the convenience of one-stop shopping for gift cards. “I have seen these gift card malls recently in grocery stores and Walgreens, and I think it’s a tremendous idea. I have family out of town, so I have turned to gift cards as a holiday gift of choice, so for me, it is a great alternative for holiday gift giving. With so much family out of town, it’s an inexpensive way to send a nice gift, because it saves so much in postage costs.”
Marra estimates 60 percent to 70 percent of her 2008 holiday purchases will be in the form of gift cards, with most of those gift cards — ranging from iTunes cards for her two teenage daughters, to a Toys R Us gift card for her 5-year-old son — purchased at her local grocery store. “Because I can buy five or more gifts in one shop, it’s economical in both time and money,” says Marra.
Time, energy and money saved for Marra and other consumers who purchase gift cards from gift card malls also means money earned for retailers who dedicate minimal floor space to third-party gift card programs. This is good news to retailers whose holiday season is expected to be poor. Financial advisory firm Deloitte predicts the 2008 season may see only a 2.5 percent to 3 percent increase — the lowest in 17 years.
“They’re looking at these types of programs to expand their brand’s presence and the opportunity for them to get a larger percentage of the holiday gift-giving,” says Llach.
Judging by the numbers, the gift card business is growing. According to research conducted by the Mercator Advisory Group, the entire store gift card category, which includes both network branded (open) and closed loop cards, cards sold in the retailers’ own stores and via distribution through card partners (in gift card malls), grew from $60.6 billion in 2006 to $66.2 billion in 2007, for an annual growth rate of 9.3 percent. However, it’s been predicted that gift card sales overall will fall almost 6 percent this year due to the economic fallout, according to the 2008 National Retail Federation’s annual gift card survey.
|Top popular gift cards for|
|1. Open-network gift cards, including prepaid MasterCard, Visa, American Express or Discover cards. In spite of the service fee of $5 to $10 (paid at the time of the card purchase by the gift giver), open-network gift cards are expected to be top-sellers this year, says Brent Watters. “That way, instead of limiting the receiver to a certain store or a certain product set, you’re now giving them the ability to go wherever they want, and use it however they want to use it,” says Watters.|
2. Restaurant gift cards: The second-highest selling gift card this year will be restaurant gift cards, says Watters. “The idea behind that is a lot of people do not have the cash now to go out to eat like they used to. So, why not given someone a nice night out?”
3. Apparel gift cards: The third highest gift cards are for apparel, says Watters. “People don’t have the extra cash these days to go buy clothes the way they normally do,” he says. Again, the gift card usage boils down to necessary-versus-“fun” expenditures.
4. Fuel gift cards. Fourth — and newest — on the 2008 most-popular list are fuel gift cards, says Watters, though he admits the recent drop in gas prices may change this ranking. “Some of the distributors have said they’ve seen an uptake in sales in fuel cards as gifts. So, $50 in gas can help relieve some pressure at the pump.”
The growth of the gift card mall
The idea to combine a variety of gift cards within one display came to Blackhawk CEO Don Kingsborough in an “a-ha!” moment, says Llach. Reflecting on the ever-increasing hectic pace of our lives, Kingsborough realized that everyone, busy or not, has to do at least one thing: go grocery shopping. His next thought, “Wouldn’t it be great if you could consolidate gift-giving through the prepaid cards within a mass market?” was followed quickly by a solution, says Llach. “He thought, ‘Let’s get prepaid products, and especially gift cards, in mass distribution, and the best location for that is where people spend some time, go every week, and that’s your neighborhood grocery — and of course, also drugstores, mass merchants and convenience stores.”
In 2001, Kingsborough’s idea took on its first incarnation: a gift card display area created with the participation of seven gift card partners. That number continued to grow, and today, Blackhawk Network’s retail partners can choose from 300 cards. Current card partners include Applebee’s, Bass Pro Shops, Bed, Bath & Beyond, Best Buy, Disneyland Resort, Foot Locker, iTunes, Lane Bryant, Regal Entertainment Group, T.G.I. Friday’s, TJ Maxx, and more.
Creating a gift card mall with Blackhawk (or other industry leader) means that retailers, in exchange for dedicating some space to the gift card kiosk, make a “little money” on the sale of each gift card, says Llach, who declined to provide the exact percentage rates or amounts earned by retailers and other program participants. By forming a relationship with a retailer (also known as the distribution partner), Blackhawk acts as a “big marriage broker,” says Llach, researching the specific needs of the retailer and creating a turnkey program between the retailer and gift card broker.
The winning proposition
Key to the success of gift card mall programs is the win-win-win equation for all involved parties. “The only time you get a new category in grocery or in any retail environment to work is when you have multiple wins: The retailer has to win; the consumer has to win; and the card partner has to win,” says Llach.
In 2001, 7-Eleven Inc. entered the prepaid market, selling primarily wireless products. In 2004, the company added third-party, gift-card merchandising units, which are located in more than 5,600 7-Eleven U.S. locations, says Brian Haynes, 7-Eleven category manager for services. “Customers are embracing our prepaid program, and this is reflected in our sales numbers,” says Haynes. “Our vendors and suppliers for prepaid have told us our merchandising display is a ‘best-in-class’ fixture. The unit is located in a visible spot toward the front of the store. It is easy to shop because of its category headers and dividers, increased product assortment as well as numerous copies of the top-selling cards. We make purchasing prepaid and gift cards quick and as simple as possible for consumers.”
Though 7-Eleven, which has partnered with Blackhawk Network in offering gift cards, does not share specifics on sales and margin, says Haynes, “We can say that prepaid purchases contribute significantly to repeat customer visits and add-on sales. We give our customers yet another reason to visit our stores on a regular basis.”
Realizing the best gift-card mall opportunities
Both retailers and card partners have decision-making power in the partnership, says Llach. On “rare” occasions, she says, a retailer may decline a specific partner’s card if that card competes with something he’s already selling. For example, a grocery store wouldn’t be likely to sell the cards of a competing grocer; nor is Walgreens likely to sell Target gift cards, since the two retailers are also competitors. A card partner, on the other hand, might bypass a retailer if the distributing retailer is geographically or demographically mismatched to the card partner — for example, a Canada-based ski resort may decline placement in a southern Florida grocery store.
On the other hand, says Brent Watters, senior analyst for Mercator Advisory Group in Maynard, Mass., some venues are simply not conducive to gift card mall placement. “If you try to go to a specialty retailer, like a hardware store, really you’re only going to capture that specific segment of consumers who are going in there for home-building supplies. Whereas, if you put the mall in a grocer’s or a convenience store, you’ve got people coming in there for a variety of reasons, so now you’ve expanded your opportunity to offer products to a number of consumers.”
Grocery-store, pharmacy or convenience-store holiday shopping means budget-constrained consumers don’t have to face the mall’s holiday lights, songs and scents, all designed to turn a consumer’s most ironclad willpower into a quivering mass of impulse buyer. In fact, the mall’s siren song can be arguably blamed for the latest trend in shopping temptation: self-gifting, in which the buyer is seduced into “purchasing to make themselves feel good,” says Watters.
“I am cautiously optimistic that this year will be good holidays for third-party gift cards because of the fact people are maybe shopping less in the malls and they like the fact that they can come to the grocery store or the drug store and get a gift card,” says Llach. “That helps them budget more effectively, helps them maintain and stay in budget.”
Post-holiday gift card spending projections
Gift card sales typically translate into increased traffic for retailers during the winter months of January and February, when consumers typically stay home both due to the icy weather and the arrival of often-staggering credit card bills. This year, however, customers will likely get more bang for their gift-card buck, with 25 percent to 75 percent price cuts after the holidays adding exponential perceived value to the face value of a gift card, says Watters.
Though retailers will pipe “Jingle Bells” and “Frosty the Snowman” through their sound systems as usual, this year’s holiday shoppers and gift-card recipients will be singing a different tune — a Rolling Stones tune, to be exact. “‘You can’t always get what you want, but you get what you need,'” says Watters. “That’s exactly what’s going to occur. It’s going to be about, ‘I went and bought myself a pair of pants,’ or ‘Susie needs new shoes,’ so let’s do that. I know I wanted that iPod or that CD so bad, but really, we need to do this, because there are very few funds available for discretionary spending.'”