Lands’ End, the US clothing retailer, marked Mother’s Day in the US on May 13 by offering shoppers an audio-equipped stored-value gift card. The buyer sends a credit-card-sized Lands’ End card worth up to $500; the recipient listens to a loving message up to 10 seconds long, then uses it to buy goods in store or online.
At Target, the mass discounter, this seems relatively stale. Its Karaoke Chipmunk card turns any recorded message into a squeaky, rodent-like song. Or some may prefer the Healthy Spa card, which comes connected to a tin of bath salts.
After a decade of rapid growth, the US prepaid gift card market, believed to be worth more than $80bn last year, has entered an era of baroque invention.
According to Dan Horne, a marketing professor at Providence College, Rhode Island, this reflects the intense competition of a maturing market. “If everyone has gift cards, you have to do something different,” he says.
Every leading US retailer now has a gift card system. An estimated $29bn (£14.7bn) worth of cards was issued by retailers last year, with banks, restaurants and petrol stations accounting for most of the rest, according to Tower Group, a financial services research group. The total market, including cards issued by banks, reached an estimated $80bn, about double its size in 2002.
“Satisfaction levels are so high . . . you walk in and it works,” says Mr Horne. “Once people receive one as a gift, they end up buying three next year.”
For retailers, benefits include additional sales, stronger brand awareness and customer loyalty. There is also the added bonus of interest-free cash and revenue gains from unredeemed cards.
Target had an estimated $338m in gift cards that had been sold but not yet redeemed in February, representing an interest-free loan that had grown by 15 per cent since the previous year. Best Buy, the electronics retailer, had $496m, up 6 per cent.
Tower Group also estimates that overall issuers gained a remarkable $8bn last year from card “breakage”. In their most recent financial years, Home Depot, the second largest US retailer, recorded a $33m gain from unredeemed cards, and Best Buy reported $27m.
In Britain, the first prepaid cards were launched by Debenhams department stores in 2002, followed by the Arcadia group, owner of Topshop and Burtons, in 2003. Some retailers, such as HMV, have yet to move from paper vouchers – now an extinct category in the US.
But the potential of the UK market has attracted US companies that operate the lucrative business of “gift card malls” – supplying display units that allow a single retailer to take a cut from selling cards for other non-competitive retailers.
Last November, US-based InComm launched “gift card malls” at J. Sainsbury supermarkets, stocking cards for brands such as Toni & Guy, the hair salon chain, and Apple’s iTunes. Coinstar, a business built around coin-counting machines, announced a deal with newsagent WH Smith in the same month.
Blackhawk, North America’s largest third party provider of gift cards and a subsidiary of Safeway, the US supermarket group, began rolling out its gift card malls with Wm Morrison supermarkets in April.
Behind what one participant calls a “land grab” in the UK lie the potential profits: Blackhawk is expected to contribute up to $100m to Safeway’s pre-tax profits this year from sales at over 63,000 outlets in the US and Canada.
In November, Circuit City and Best Buy produced cards that can be used both to make purchases and as DVDs, with music, games and video material. These are produced by Serious, a British digital publisher that launched itself by making digitally readable collectors’ cards for the Euro 2000 soccer tournament.
Serious has now entered an alliance with InComm that is expected to lead to more digitally readable cards with other brands. David Brown, its chief executive, points to the ability of the cards to enhance a retailer’s online channel, through connections that are activated as a PC is used to play the audio or visual material.
“The US market is showing signs of such saturation that innovation is going to drive growth,” he says.
Mr Horne, meanwhile, argues that features such as the Karaoke Chipmunk are likely to secure the future of physical cards, in spite of online and wireless vouchers. “Someone will always develop better ways to deliver the benefit provided by gift cards . . . but there will be some physical presence, because the presentation of the gift is so important.”
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