I was sent the following link from about a dozen friends and clients this week.
Bankruptcy makes gift cards worthless
If you don’t feel like reading it, that’s fine…here’s the meat of the article.
The Sharper Image filed for Bankruptcy protection, and as a result, aren’t honoring their gift-card program any longer. My initial reaction was “Of course…if a company goes under, you can’t spend it there either.” Then I started reading between the lines for the deeper meaning of the issue at hand.
Merchants rely on what is referred to as “Breakage” to help offset the cost of a Gift Card program. Normally, a merchant can expect that somewhere between 12%-18% of the money put on a card won’t ever be redeemed. One guy may spend all $20, another $5 before he looses it, and another may throw it out mistakenly in a pile of wrapping paper while trying to straiten up the house before Christmas dinner. (That’s NEVER happened to me!)
Retailers bank on this because they generally pay $.25 for the transactions coming and going. If you buy a $100 card, the retailer gets all $100 up front, and a network like SparkBase keeps track of the money for the merchant. Over time…2-3 redemptions will happen, and the merchant will have paid out $1.00-$2.00 in fees for having someone else process the transaction. Normally, they don’t mind because the law of breakage says they’ll keep about $13.00 of that $100.00. Now, back to the matter at hand…
Because they have to honor the card indefinitely in some states, Gift Card revenue isn’t required to be reported as income until they redeem it. If I buy a $100 card to “Moe’s House of Shoes” down the street, and loose the card, it’s the same as loosing a $100 bill. Moe never has to honor the card, but if I DID bring it in, he’d have to. It’s like an IOU that never expires, and is completely transferable. So at the end of the day, if I loose my card, and never spend that $100…Moe never has to pay income tax on it, because if I show up with it…he’ll honor it. The Home Depot recently had to deal with $43,000,000 in breakage.
The Home Depot tallied gift card breakage from 1998, when it began its gift card program, to 2001, and reported it as income in its June 2 filing. “Since we had not reported breakage before, this was essentially just catching up,” said Home Depot Marketing Manager Diane Linke. “Going forward, there will be additional breakage reports, but not nearly on the magnitude of this quarter.”
So back to our friends at The Sharper Image. I don’t have access to the totals, but they may have HAD to expire the cards in order to comply with bankruptcy laws. I’m no attorney, but I’d hazard a guess that this is the reason.
The question I was asked most often was “Does this effect your business?” Not in the slightest. Consumers are still choosing Gift Cards as the standard for all their gift giving needs. My business is doing nothing but growing.
