No longer seen as the lazy man's excuse for a last-minute holiday present, gift cards are fast becoming a popular consumer choice.
Half of all American consumers this holiday season are expected to buy at least one card, and a National Retail Federation survey says that $1 of every $12.50 spent during the holidays will go toward gift cards. That's a hefty $17 billion.
The magnetic-stripped plastic card that works like a debit card has supplanted its predecessor, the paper certificate. Conservative estimates show that the value of such cards sold has grown about 15 percent a year since the early 1990s.
The reasons for the trend vary. This year's clear absence of a hot toy means parents may pick up a gift card instead of playing the hit-or-miss game of guessing what their children like. The wrong decision often translates into a trip straight to the back of the store's dreary returns line during the post-holiday mob.
"The cards allow people to come in and get what they want and not what other people 'think' they want," said Don Harrison, spokesman for The Home Depot. The home-improvement chain used to offer gift cards in different denominations up to $100, but now allows customers to put any amount up to $2,500 a day on a card.
Convenience is another big plus.
The shopping experience is a lot faster and hassle-free when there's no need to lug big, lumpy bags through crowded aisles. Cards are generally accepted in all or most of a chain's locations. That sort of flexibility and attention to consumer choice is also seen with some "mall cards" that let cardholders shop at any store in a shopping mall.
Banks issue gift cards that can be used at any business that accepts the credit-card brand. Bank of America, for example, sells Visa gift cards that can carry up to $600.
Retailers are making it easier to buy cards online and by phone, too. A variety of cards are being sold through third-party retailers such as Bi-Lo, which offers about 30 different cards for such stores as Toys "R" Us, J.C. Penney and Bed Bath & Beyond.
Lots of cards also come with toll-free hot lines, much like credit cards. If the card gets lost, a receipt or other proof of purchase often is enough to get it canceled and replaced with a new card. Expect a fee, though.
A gift card makes economic sense because it can give the consumer a bigger bang for the buck when used after Dec. 25, when retailers offer deep discounts.
Though the stigma of the card being a bit cold and impersonal does linger - not to mention how odd it looks under the Christmas tree - retailers have come up with ways to make the cards more accessible and acceptable.
Jazzed-up versions of the cards are ablaze with a cornucopia of colors and carry cute holiday icons and images, such as Target cards featuring puppies in a stocking. They can be found next to many checkout counters alongside the candy, tabloids and other impulse buys. Macy's-Rich's has branched out by looking to tap the surging Hispanic population and selling Spanish-language cards saying "Feliz Navidad."
What's in it for them?
A good rule of thumb in the business world is that if the buyers are benefiting, so are the sellers.
Gift cards get consumers into stores where they often spend between 15 to 20 percent more than the card's allotted amount. For that reason, a Blockbuster Video promotion gives away free $5 gift cards each time a person purchases $50 worth of gift cards.
Aside from driving sales, gift cards cut down on the resources a store has to devote to handling returned items.
Another big advantage for the retailer is the issue of the "free money" that unused cards bring the company.
"Some people never use them or don't spend the entire amounts," said Barbara Coleman, a marketing professor at Augusta State University. "It's a great strategy because it's money in the bank for the retailer."
Retailers make money when consumers buy products, but they make almost a pure profit when they sell a gift card that gets lost or goes unused.
Industry trackers say that about 10 percent of the value of all gift cards never get redeemed, amounting to between $4 billion and $5 billion a year of cost-free cash into retailers' pockets.
The magnetic strip across the back of the card helps retailers hone their marketing strategies by tracking where the card was bought, where it was used and what items it purchased.
"That's additional information for the retailer," Ms. Coleman said. "And information is power."
The fine print
As with any product, it's important to read the fine print to see restrictions. Some cards can be used only at "participating stores," and others can't be used for every item in a store. Cards ordered online or shipped to the home might carry additional fees.
The big bugbear, though, centers on cards that expire or charge fees when they're not completely redeemed after a period of time.
A Macy's-Rich's gift card expires after two years, for instance, but a Circuit City card charges a $2 monthly fee after two years.
Recent laws in California, Massachusetts and New Hampshire prohibit such hidden maintenance fees, and proposed federal legislation would do away with them in all states.
IT'S ALL IN THE CARDS
Cards, denominations, fees and expiration dates:
IF YOU BUY ONE
Here are a few tips to get the most out of that gift card:
Source: The Motley Fool
Reach Matthew Mogul at (706) 823-3352 or firstname.lastname@example.org.