a gift for all seasons

Convenience retailers are building incremental sales with “gift card mall” selections from a host of local and national retail chains.

Convenience retailers are building incremental sales with "gift card mall" selections from a host of local and national retail chains.

By John Lofstock, Editor

Convenience and grocery executives are desperately looking for new growth drivers. And with intense pressure from competitive channels that has flattened margins, fresh revenue streams are hard to come by. But, after observing the continued popularity of prepaid services, marketers are finding the next logical step is a comprehensive prepaid gift card program offering cards to popular local and national chains.

These "gift card malls," the term referring to a designated display of retailer gift cards, offer marketers a turnkey solution to providing customers with a range of prepaid services that can be purchased and activated right at the front counter. Card categories range from dining, clothing and entertainment to home services.

The benefit of the gift card offering is there is no drop off from the cards consumers would purchase directly from participating retailers, though they are typically available in fewer denominations. For instance, while most retailers allow you to buy a gift card in any amount at one of their stores or online, the cards available in convenience stores are typically available in $25, $50 and $100 increments, said Teri Llach, group vice president of Blackhawk Network, a gift card processor and subsidiary of Safeway Corp.

"Prepaid gift card malls are all about offering consumers convenience and enhancing value to the one-stop shop," Llach said. "It’s rare these days that retailers can create an entirely new category segment in their stores that generates some excitement, but prepaid gift cards are doing that. Penetration is growing and we are anticipating tremendous growth in this area."

Blackhawk is in 38,000 stores nationwide, including Safeway, Wawa, Circle K, Petro-Canada and Chevron. Cross-channel marketers are reciprocating. CVS and Walgreens carry gift cards from the likes of Shell, ExxonMobil and BP.

While selling prepaid cards to other retail chains sounds like a risky proposition, industry marketers say it’s a win-win. For example, for each card sold, chains like White Hen, Kroger and Wawa receive a small percentage of the value. The commission comes out of the bottom line of the company whose gift card was purchased.

For retailers like Lowe’s and Starbucks, the percentage paid to the chain that activates the card is regarded as the cost of doing business. C-stores provide increased distribution points for the cards, while keeping the brand name in front of consumers on a daily basis. Gift card malls also allow them to increase revenues without increasing expenditures. Plus, a study by Bain & Co., a research and consulting firm based in Boston, found consumers tend to spend more than the face value of a gift card when making their purchase.

Demand Growing
Circle K carries gift card malls in about 2,100 stores featuring dozens of retailers, including AMC Theatres, Barnes & Noble Blockbuster, Chili’s Restaurants and Sears, and it has been pleasantly surprised with the program’s effectiveness.

"Gift cards have become the favorite gift to give—and receive—because they always come in the right size, color and flavor," said Dan Stiel, manager of financial services for Circle K. "We recognized how difficult and time-consuming it can be to choose the perfect gift for family and friends and devised a solution that allows consumers to accomplish this without the hassle of going to the mall."

Other suppliers are following Blackhawk and offering similar programs. InComm and Coinstar EPayment Services last year rolled out gift card mall programs featuring prepaid cards from about 2,000 retailers across all segments.

Sales tend to pickup around holidays and special occasions, such as graduations. Customers spent an average of $248 on gift cards during the December 2005 holiday season, an increase from $223 in 2004 and $183 in 2003, according to an annual survey of adult gift card purchasers/recipients conducted by electronic gift card program provider Stored Value Systems (SVS).

Additionally, the percentage of purchasers for whom a gift card is a planned purchase from the minute they make their list jumped dramatically from 69% in 2004 to 84% in 2005.

"The survey reinforces a trend we’ve seen over the last two years," said Bob Skiba, executive vice president and general manager of SVS. "We continue to see a larger number of buyers who intentionally choose a gift card to ensure the recipient gets something he or she would enjoy. And the convenience factor is not far behind."

This year’s findings also revealed that the percentage of those who use gift cards in the U.S. is remaining steady: seven in 10 have either purchased or received a gift card, and of the three who have not, one-quarter say they are likely to make a first purchase in 2006.

Other key findings from the survey include:

  • On average, the number of cards purchased in the past year has increased from 4.5 in 2004 to 6.5 in 2005.
  • The No. 1 occasion for gift card purchases is birthdays (81%) and, second, the winter holidays (67%).
  • The average value of gift cards purchased in the past year is $40, a fairly steady level for the past three years.
  • The importance of the appearance of the card saw an 11% increase.
  • Among those who have received gift cards, almost three-quarters use their cards up completely and one-third of gift card recipients redeem the entire value of the card within one month of receipt. All but about 6% have redeemed it after one year.
  • Department stores, restaurants and clothing stores are the preferred places from which to receive gift cards.

Overall gift card sales soared toward the $50 billion mark in 2005, according to the Bain & Co. study.

That has chains like White Hen Pantry aggressively promoting gift card sales this holiday season. The Chicago based chain of 265 stores is hoping that many of its 250,000 daily customers will begin viewing its gift card center as regular stop around holidays and special occasions. White Hen offers more than 30 varieties of gift cards featuring the likes of Barnes & Noble, Best Buy, Home Depot and American Express.

"The name of the game is convenience," said White Hen Marketing Manager Ari Goldsmith. "Instead of looking for a parking spot at the mall and waiting in lines, gift givers are visiting the checkout line at their local White Hen."

Like White Hen, Kroger has rolled out a gift card mall at its convenience stores and supermarkets in the Midwest emphasizing prepaid cards from about two-dozen chains like Bennigan’s, Lowe’s and T.G.I. Friday’s.

"It gives the retailer another channel through which to reach customers without having to put up any brick and mortar," Skiba said. "Because we’re a time strapped society this really works."

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