Gift cards: the lure of plastic

Over the past five years, gift cards have exploded onto the retail scene. According to Statistics Canada, 82 per cent of retailers were in on the gift-card game by 2006. Three years earlier, just over a third of retailers offered such cards. Now it's hard to find any retailer who's not issuing them.

Retailers love them and many consumers like getting them.

Over the past five years, gift cards have exploded onto the retail scene. According to Statistics Canada, 82 per cent of retailers were in on the gift-card game by 2006. Three years earlier, just over a third of retailers offered such cards.

Now it's hard to find any retailer who's not issuing them. It's tough to safely put 30 litres of gasoline under a Christmas tree — but you can give your kid a $25 card from a service station chain. And Via Rail offers the gift of travel, in just about any denomination you want.

The most successful gift card in North America may be the one offered by Starbucks. The company estimates 10 per cent of all the caffeine hits served up by its North American baristas is paid for by gift cards. It's also the only retailer that will let you use your gift card to buy another for someone else.

Last year, Canadian coffee-shop rival Tim Hortons unveiled its own line of plastic gift cards.

The priciest around may be the $100,000 Four Seasons card. When the luxury-hotel chain began offering gift cards in 2005, they were available in denominations up to $1,000. But cards worth $2,500 and $5,000 were quickly added and can be ordered online.

The rich and generous can even spend up to $100,000 on a gift card by contacting the Toronto-based global hotel chain and speaking to a sales rep.

Sold on convenience

A survey by the U.S. National Retail Federation last year suggested that eight out of 10 people would include gift cards among their holiday shopping purchases. The main reason given: convenience.

But the love affair with the cards may be waning — at least temporarily. This year, the federation expects sales of gift cards in the U.S. to fall by six per cent thanks to tougher economic times.

"Since gift cards never go on sale, some price-conscious shoppers will be passing up gift cards in favour of holiday bargains," NRF president and CEO Tracy Mullin said in a release.

Retailers are expected to offer deep discounts in an attempt to move inventory, which could make a $50 cash purchase now go much further than a $50 card would at some point in the future when — or if — it's redeemed.

That has put gift cards under increasing scrutiny in recent years. The Consumers' Association of Canada says people should avoid buying the cards because too often consumers are just giving money to retailers and getting nothing in return.

The association's president, Bruce Cran, estimates about one in every four gift cards goes unredeemed, and "they're a very poor proposition for consumers."

Cash preferred

"In the event that you can't give a [standard] gift, give cash. That's what you should do," Cran said, adding there's also the risk of a store going bankrupt before a card is used.

According to market research firm NPD Group Canada Inc., 40 per cent of adults received at least one gift card last holiday season. But as many as 40 per cent of the cards had not been redeemed by March.

That's money in the bank for retailers — and money doing nothing for consumers.

U.S.-based Consumer Reports magazine has repeatedly warned people to tread carefully with gift cards. It estimates that around 25 per cent of gift cards that were bought in 2007 still have not been redeemed.

More than a third of the people surveyed said they either forgot about their cards or lost them — or the cards had expired. Another third said they couldn't find anything they wanted to spend their gift card on. Almost 60 per cent said they didn't have the time to shop.

Here are some more questions and answers about gift cards:

What's the difference between gift cards and gift certificates?

It's more than just plastic vs. paper. While both products are sold in pre-set denominations, you may get cash back if your gift certificate is worth more than your purchase.

Pick up a pair of $45 pants with your $50 jean store gift certificate and you can go down the street and buy lunch at the doughnut shop with your change. Not so with a gift card. Buy something for $45 with the $50 gift card and you have $5 left on the card to spend at the same store next time you're there.

Gift cards may be far more popular than gift certificates, but plastic hasn't killed paper yet. Many fast-food restaurants and movie theatres still offer gift certificates — paper is cheaper when you're doling out gifts in small denominations.

What other advantages do gift cards offer retailers?

Studies show that people spend more on gift cards than on gift certificates. The average card denomination is $50 — twice the amount people would spend on the average gift certificate.

And armed with that gift card, you're more likely to spend more than its face value when you shop — as much as twice the value of the card.

Research also shows that people who buy with gift cards are less likely to be fussy about the price they're paying. A study by the J.C. Williams Group found 40 per cent of shoppers using a retailer's card bought items at full price, while only 16 per cent of shoppers using other payment methods bought at full price.

Retailers are also partial to gift cards because they tend to decrease the amount of merchandise that is returned. You won't have to fake it when you say, "No, I really do like it," when you open what Grandma got you this time.

Another reason retailers have taken to gift cards is that they appear to smooth out the drastic sales drop in the weeks after the busy Christmas season. The cards are purchased in large numbers in November and December and given as gifts at Christmas. But many are not redeemed until January or later.

On March 21, 2006, Statistics Canada reported that gift cards helped propel January 2006 retail sales to a record $31.8 billion — up 1.4 per cent from the normally frantic holiday shopping season in December.

The reason? Retailers don't record a gift card purchase as a sale until it is redeemed for merchandise.

Oh, and they're a lot harder to counterfeit than gift certificates.

Are there any disadvantages for the retailer?

They're not cheap. Gift cards can cost a retailer from 50 cents to $3 each, depending on how many are ordered. So if you're a small or medium-sized business, chances are you can't afford to offer your customers your own card option.

There are also implementation costs of up to $50,000.

Retailers generally have to go to an outside company to set up a program. On the other hand, the retailer normally pays a fixed amount for each transaction instead of the three per cent that credit card transactions cost.

Are there other disadvantages for the consumer?

Besides letting gift cards gather dust or losing them, consumers can be left with worthless plastic if the issuing retailer goes belly-up. That's happened more than a few times south of the border this year as a tanking U.S. economy took its toll on the retail sector.

In November, U.S. electronics giant Circuit City filed for bankruptcy protection. The company's Canadian chain — The Source by Circuit City — also filed for protection from its creditors.

For the next week, it was unclear whether the company would be allowed to honour its gift cards, as cardholders would be considered unsecured creditors. However, a U.S. court cleared the way for the chain to honour the cards.

The company intends to reorganize and stay in business, but it'll have to persuade enough customers that they should continue buying its products.

As the 2008 holiday shopping season loomed, a general e-mail made its way across the internet warning consumers to avoid buying gift cards from 30 retail chains (mostly U.S., but some with a presence in Canada) because they were on the verge of bankruptcy.

But while retail can be a difficult business — especially in tough economic times — there's no indication that the chains on the list were in imminent danger of going under.

Expiry dates and added fees are two issues that have always irked consumer groups. Ontario, Manitoba, Saskatchewan and Alberta have enacted legislation that bans expiry dates, fees for using the cards and maintenance fees charged if you don't use the cards within a prescribed period.

B.C. and New Brunswick have similar legislation in the works.   Most American states have also passed legislation that places varying levels of restrictions on expiry dates and maintenance fees.

Most Canadian retailers have decided to drop expiry dates and maintenance fees, but there are still some exceptions.

In Ontario, cards issued by third parties — like shopping malls — can charge a $1.50 processing fee and a monthly $2 maintenance fee, but only if a balance remains after 15 months.

Gift cards issued by credit card companies like Visa and MasterCard may carry other fees, like the 2.5 per cent foreign currency charge that credit card companies tack on to your purchases when you use plastic outside Canada.