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  1. Analysis
January 31, 2012

Gift cards: know your market

Christine Toner considers the importance of cultural differences to the development of closed loop gift products, and looks at where the biggest opportunities could lie.

By Verdict Staff

Gift cards and e-money retail products present significant opportunities around the world. But a one-size-fits-all approach does not work. Christine Toner considers the importance of cultural differences to the development of closed loop gift products, and looks at where the biggest opportunities could lie.

 

Box out showing gift cards Q311 financial statsIn many of the world’s largest economies, consumer confidence is low and even previously-considered invincible brands are feeling the pressure to better understand and influence consumer spending behaviour.

One market that continues to attract attention in this context is gift cards. They can mean big business for retailers.

In the UK, for example, most recent figures from the UK Gift Cards and Vouchers Association (GCVA) value the industry at £4bn ($6.2bn). Meanwhile, in the US, sales of gift cards grew by 10% in 12 months (according to the Retail Gift Card Association) despite the economic climate.

The same cannot be said for all countries, however. While gift cards are clearly flourishing in some locations. But in others they are failing to take off. So what is it that dictates the success of gift cards in any given market?

In the UK the gift voucher market has been established for over 80 years. Andrew Johnson is director general of the GCVA.

“Gift cards are just a natural replacement for paper vouchers,” he says.

“In the UK we already have a strong culture of giving gift vouchers. This market is one of the biggest. However, some markets, like Italy, are not doing as well, mainly because they give homemade type gifts rather than cash based gifts.”

 

Questions of culture

Indeed culture plays a big part in determining success. Giving money as a gift, which is essentially what gift cards do, is seen as unacceptable in many countries.

And of course, changing a culture that has been developed over many years is no mean feat.

“It would take time,” says Johnson. “People are buying them, but the cultural differences have a significant impact. You have to be in it for the long term.

“It is partly the reason why gift cards and prepaid products in general are so popular in the US. Giving cash based gifts there is fine.”

The gift card market in the US is certainly doing well, something Rebekka Rea, Director of the RGCA says developed over time.

“In the US consumers were accustomed to using coupons or loyalty programmes like Green Stamps,” she says. “When gift certificates were introduced they were treated much like a promotional voucher for goods or services. The transition to plastic really stimulated a rapid growth in the acceptance and use of gift cards, which were much more durable and convenient.”

Rea does not expect this growth to slow down any time soon. In the eighth Annual Closed-loop Prepaid Market Assessment by the Mercator Advisor Group, gift cards remain the number one most requested gift.

It certainly helps that gift cards in the US do not have dormancy fees or expiration dates.

“You can give a gift card to someone and have confidence that whether they redeem the card in three weeks or three years the entire value of the card will still be available,” says Rea.

 

Brand positioning

The cards also give givers the chance to promote a brand of their choice.

“While a gift card provides the recipient with the opportunity to choose their own gifts, it also allows the giver the opportunity to promote a brand they like,” says a spokesperson for Maine-based retailer LL Bean.

“In addition, gift cards help gift-givers at those times when the inventory of a specific product may have been depleted, yet the intent is still for the recipient to have that item.”

This flexibility is an obvious draw, and most major retailers have a voucher or card product. According to the GCVA’s Johnson this is true of retailers at both ends of the market from high street shops like Marks & Spencer to designer names such as Lacoste and Burberry.

Salima Yala is divisional vice president for layaway at one of the US’ biggest brands Sears Holdings.

“Gift cards that are hassle free and easy to redeem are most useful to both the purchaser and the recipient,” she says. “All our gift cards [Sears Holdings brands include Sears, Kmart and Land’s End] can be cross-redeemed at any of our retail outlets as well as online.”

But does the fact that these products are plastic cards, rather than paper vouchers really have a big impact?

 

Persistent paper

Box out showing gift cards facts and figuresOver the Christmas period, retailer John Lewis saw a significant increase in voucher sales, with an especially strong performance in the final two weeks, demonstrating a definite appetite for prepaid products.

However, according to spokesperson Kerry Taylor, the retailer does not have any plans to change to plastic cards.

This brings us back to old habits and the need for cultural understanding. But the UK GCVA’s Johnson would argue that retailers who stick to paper are ignoring consumers’ preferences.

“We did a survey in 2010 and there was a preference for gift cards over paper vouchers,” says Johnson. “Part of the reason for that is you are just buying one card and not buying several paper vouchers. The general view is security is also better on a card.

“Of course, the other advantage to the retailer is that they can displayed on the shop floor, rather than being kept behind the till.”

Yvonne West, general manager at the Prepaid International Forum and an expert in gift cards, says one reason retailers may be sticking with paper vouchers above plastic cards is the costs involved with changing.

“When we looking at the barriers to adoption, the clearest is the cost to set up,” she says.

“There is still fraud to take into account, and processes in store to manage. The positives are mostly in line with liability on the balance sheet and knowing what is in the market, which for many retailers they do not know when they only use paper product, but it is cheaper to run.”

Opticard is a provider of gift and loyalty card systems based in Omaha, Nebraska. Since it was established in 1990 it claims to have serviced over 50,000 merchants and has seen the adoption of incentive based card programmes explode.

“Today, few merchants exist without providing a gift or loyalty card program,” says Andrew Kawa, director business development at the company.

“The US certainly drives much of the economy through retail sales. In the U.K. electronic gift cards are relatively new to the process. It has really only been approximately 10 to 12 years in which this technology penetrated the UK Market. Certainly ‘vouchers’ are widely used in the UK so the thinking is consistent and I believe you will see that the plastic card will soon become very popular.”

 

Better value proposition

Encouraging consumers and retailers to adopt plastic cards however is dependant on whether their product is adaptable.

High street vouchers, for example, can easily lend themselves to the plastic card model. However products like pre-paid ‘experience’ vouchers may not.

Smartbox is a unique product within the gift category which allows the recipient to chose the what, then when and the where of their gift. Garry Barone, head of sales and marketing, says adapting this product to a gift-card format would be difficult.

“Our goal – or challenge – is to evaluate the potential of transferring our boxed product into a card format,” he says. “This is not easy to replicate on a card format – the boxes contain anything up to a 400-page glossy brochure as well as e-vouchers.”

E-vouchers – or virtual vouchers – are a fairly new addition to the prepaid family. Companies such as Amazon, for example, offer downloadable paper vouchers. Customers can buy and print the voucher at home, or simply send to the recipient by email.

“They are becoming more and more popular,” says Johnson. “More and more retailers offer them. Virtual products generally are more appealing to a younger market. Their popularity lies in the fact they are instant.

“You can send them virtually, even through Facebook. Christmas day becomes a shopping day like any other. If you find you got a gift from someone you didn’t expect to get a gift from, you can send them something instantly.”

 

Further development

The developments being made in the gift card arena are certainly dynamic.

Recently prepaid automation specialist Stanton Consultancy Ltd (SCL) joined forces with Self-Service Networks (SSN), which provides self-service kiosks, to introduce self-service gift card kiosks in shopping centres and other establishments in the US. Following success in that market, SCL and SNN now plan to roll the programme out in Europe.

“We have not only created an additional low-cost and secure sales channel for large and busy malls but also a viable way to open up new sales opportunities within smaller malls, retailers and satellite locations that currently lack a formal concierge desk or the staff to sell gift cards,” says Ray Stanton, managing director of SCL.

“We see no reason why the same solution cannot be applied in Europe where retail self-service applications are gaining ground.”

 

See also:

Visa issues prepaid cards at ATMs

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