TowerGroup Forecasts Private Label Gift Card Sales to Decline 7%

According to recent research, TowerGroup expects the second annual decrease in private label store gift cards and a slight increase in general purpose gift cards.

TowerGroup projects volumes for gift cards will fall slightly in aggregate during 2009, from $91 billion to $87 billion.

Store gift cards fall into three categories: restaurants, retailers and miscellaneous. Consumers are expected to exhibit more practical usage in each category: fast food will perform better than white linen dining; discounters will perform better than high-end specialty stores and niche players like local stores will experience the largest negative impact.

TowerGroup estimates that lost value, referred to as spillage in industry jargon, improved to 6% from a high of 10% in 2007; this lost value still represents nearly $5 billion.

"The attractiveness of captive store gift cards appears to be waning, particularly in an economy in which retail inventories are shrinking and consumption is concentrated on more practical purchases like food, gasoline and heating oil," said Brian Riley, Research Director, Bank Cards, at TowerGroup.

"This is a buyer's market in which consumers can expect heavy discounting from retailers. However, since inventories won't be backed up in stock rooms, but will be out on the sales floor until depleted, delayed shopping, the natural arena for gift card spending, can lead to a diminished selection. As a result, unlike other years, store gift cards might be limited to post-holiday leftovers. This year, it might make sense to buy that cashmere sweater early or give a card that does not bind the recipient to a particular store."

"Consumers purchasing store gift cards should also be careful because protections under Title IV of the Credit Card Accountability and Responsibility and Disclosure (CARD) Act probably will not go into force until August 2010," added Riley. "These protections require enhanced disclosure on fees and require that cards be given at least five years of transaction capability before expiration. While Title IV of the CARD Act provides protections that will amend the Electronic Payments Transactions Act (EFTA), it is silent on the issue of ensuring that store gift cards do not lose value when a retailer files for bankruptcy. It also does not create an environment in which cardholders can dispute transactions, as they can on their credit and debit cards."

"One hundred million dollars in loaded gift card value became compromised when retailers such as Sharper Image and Linens 'n Things failed in 2008," Riley concludes. "It is important for the payments industry to ensure that consumers receive full value, particularly as the payment card industry reengineers itself in 2010. Gift cards are a subset of the prepaid debit card. The prepaid debit market is poised to grow heavily next year because card issuers face constraints on pricing, tighter credit and new business models. In addition, volumes are shifting to debit cards as consumers become more frugal, but issuers now need to contend with regulators' potential constraints on punitive fees for overdrafts, which will affect products offered by retail banks in the United States."

TowerGroup will publish its annual review of the US gift card market, which is entitled Gift Cards: Still Better to Give than Receive on November 30, 2009.