Holiday EDInomics Part 4

Of all the presents exchanged this holiday season, what gift do you think was received by more people than anything else?

• Video Game Consoles
• Navigation Devices
• DVDs
• Clothing 

If you read the title of the blog you probably have already guessed that none of the answers above are the one I am looking for.  The answer is gift cards.  Gift cards have enjoyed phenomenal sales this holiday season.  An NPD Group poll found that 61% of consumers are giving gift cards this year.  I doubt you would find any other product category so frequently purchased as a holiday gift.

Although Christmas is over, the shopping has just begun for many.  Gift cards have contributed to a third big wave of holiday shopping (following 1) the Thanksgiving weekend and 2) the few days preceding Christmas).  A CNNMoney story posted earlier this week suggests that American consumers will spend $60B on retail purchases during the week between Christmas and New Years.  In 2007, December 26^th will ranks 6^th amongst the highest grossing retail shopping days of the year.   Of course, the post-holiday rush is not driven by gift cards alone.  Retailers often host aggressive merchandise promotions in their end-of-year sales.   Aftermarket accessories are another driver for post-holiday sales.  Consider all those electronic devices your family received on Christmas.  How many people will take to the stores in search of accessories, batteries or media to support these new gizmos?    But back to gift cards - the sales uplift received by retailers doesn’t stop at year end.  Gift card redemptions will carry forward into January providing a boost to first quarter sales for many retailers.

I have been fascinated by the growing gift card phenomenon in the US for the past several years, but it wasn’t until this holiday season that I put my finger on what really intrigues me.  It started with a visit to Safeway earlier this month.  While I accompanying my wife on a weekly grocery shopping trip, I turned the corner of an aisle and was amazed to see an entire rack of gift cards located on one of the end-caps.  This end-cap was prime real estate in the grocer’s floor plan, occupying space near the check out registers that would otherwise be reserved for a high-turnover promotion item.   But the plan-o-gram strategy was not what caught my attention.  What was fascinating to me was that most of the cards were not for redemption at Safeway.  The cards featured brands of third parties.  For example, there were a variety of cards from other retailers including DIY stores such as Lowes and Home Depot; department stores such as Kohl’s and Sears; and food service establishments such as Red Lobster and Outback Steakhouse.

Safeway is not the only retailer selling other retail brand cards.  General merchandisers such as Wal-Mart and Target; convenience store operators such as 7-Eleven and WaWa; and grocery stores such as Kroger and Albertsons are all selling gift cards.  Cards are available for telecommunications services such as long distance and wireless calling as well as for entertainment venues such as theme parks and sporting events.  And there are general purpose cards available from leading payment brands such as MasterCard, Visa and American Express.  Most interesting to me is the growing willingness of retailers to promote gift cards from other retailers.  The cards carried are never from direct competitors, but instead from popular food service, electronics, DIY and specialty store brands.   Well, at least, not traditional competitors.  I did find it intriguing that a grocery store would promote gift cards for food service chains.  One of the biggest challenges grocers face with increasing sales is the continuing trend of Americans to eat out at food service establishments.   In many respects, food service is a competitor to the grocery segment.  So the prominence of food service gift cards is either a gross oversight on the part of merchandising department or an ingenious strategy to capture sales from a non-core segment - the food service market.  I’ll assume the latter.

The New Retail-to-Retail Channel 

Typically retailers have limited their merchandise assortment to products they purchased from suppliers national brands, private label items they designed themselves and occasionally services from third party contractors.  Rarely, if ever, have we seen retailers selling products or services from another retailer.  The gift card has introduced a new horizontal, retailer-to-retailer channel into the market.

What are the implications for EDInomics?  We will explore this topic in a future post later this week. 

Steve Keifer

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