Posted on: Wednesday, December 22, 2004

Gift-card options expand for small companies

By Rhonda Abrams
Gannett News Service

Gift cards are everywhere: big department stores, bookstores, electronics stores, even hardware and grocery stores. But can you buy — or offer — one from a small business?

For years, I've encouraged small companies, including service businesses, to sell gift certificates. Of course, customers have been able to get gift certificates for businesses such as beauty salons or spas, but how about for dentists (for teeth whitening), interior designers, personal trainers, dog groomers?

Gift cards, however, offer many advantages over paper gift certificates — the biggest of which is customers love them. Without a doubt, gift cards are the hottest trend in retail.

Two recent studies (by the National Retail Federation and by the accounting firm Deloitte and Touche) show the explosive size of the gift card market:

• 74.3 percent of consumers will buy a gift card this holiday season

• 81 percent of consumers received a gift card last year

• 50.2 percent of consumers would like to receive a gift card

• 12 percent of shoppers bought gift cards for their own use

• 11.5 percent of the average consumer's holiday budget will be spent on gift cards.

Gift cards can be more profitable for a business than paper gift certificates. Here's why:

• No cash back. When customers redeem paper gift certificates for amounts less than the certificate amount, most merchants give cash back. Plastic gift cards can be "reloaded," so it's usual to leave the remaining amount on the card, encouraging additional purchases.

• Customers buy more. Twenty-one percent of gift card users spent more than the face value of the card. The average face value of a gift card in 2003 was $47.20; those who spent more averaged a whopping $90.

• January sales. Many of those who receive gift cards redeem them in January, often a slow month for many companies. January is now one of the biggest sales months of the year for bookstores, due in large part to gift cards.

• Hard to forge or steal. Because gift cards have no value until they are "loaded" at a point-of-sale (POS) terminal, they are more resistant to fraud or theft than paper certificates.

• Can be visibly displayed, encouraging purchases. Businesses can display gift cards where clients or customers can easily see them — unlike paper gift certificates, which are usually locked away.

With more than one out of every 10 holiday dollars being spent on gift cards, can small companies take advantage of this trend? The answer, unfortunately, is not very easily, because of the equipment and software required.

But small business gift card options are quickly expanding.

"There are different routes for a merchant to take," according to John Owens, senior vice president of debit and prepaid products for US Bank, headquartered in Minneapolis. With a closed-loop system, a customer buys a gift card that can only be used from that merchant. "Those dollars never leave the store, but it requires a potentially incremental increase in infrastructure at the point of sale. It makes a lot of sense for large merchants."

"Another route out there now," Owens said, may be better — and cheaper — for small companies. "It's a gift card that rides the Visa or MasterCard rails but is heavily branded with the local merchant. ...The receiver may perceive that it can only be used at that merchant." As long as the business accepts Visa or MasterCard, there's no change in point-of-sale equipment and costs are lower. "From a merchant perspective, (it's) the same as any credit card acceptance."

In other words, a customer could purchase a gift card with your company's name and logo, that is actually a "stored value" Visa or MasterCard. The customer could, conceivably, use it anywhere Visa or MasterCard is accepted, but there's a high likelihood they'll bring it back to your business. Owens said a merchant can even restrict the use of the card to certain classes of businesses, increasing the chance that it will be used in their store.

For now, the cost of gift cards for small companies is probably prohibitive, but I expect this will change — quickly. With so much money now in the gift card business, banks and other providers will find less expensive ways to serve the small business market. I'll keep you posted.