Spending on private label store gift cards is projected to fall by 7% this year, as consumers tighten budgets in reaction to a weakened economy. Gift givers are also getting nervous about what retailers will have on the shelves after the holidays, as stores move to reduce inventory. General purpose prepaid debit cards are rapidly gaining favor as an alternative.

Research from financial advisory firm TowerGroup projects total gift card spending in 2009 will fall from $91 billion to $87 billion, the second straight yearly decline. Store gift card sales are projected to fall from $63 billion last year to $58 billion, while general purpose prepaid gift cards are projected to show a modest 3% increase to $29 billion from $28 billion last year. In fact, sales of general purpose prepaid gift cards, such as Mastercard or Visa prepaid debit cards, have increased the last five years in a row. Gift cards are a subset of the growing prepaid debit card business.
And don't expect the holiday shopping season to help store gift card sales this year. In a separate report last week, the National Retail Federation reported that holiday gift card sales are down for the second year in a row, showing a slight decline from $24.9 billion in 2008 to a projected $24.1 billion this year.

"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, TowerGroup Research Director, Bank Cards, in a statement announcing the research.

Frugal consumers are moving away from store gift cards because cost concerns have retailers stocking less merchandise these days; since gift cards are generally used later in the shopping season, family and friends may be limited to a limited selection once they actually go shopping with the cards. Financial troubles at retailers are another concern.

"One hundred million dollars in loaded gift card value became compromised when retailers such as Sharper Image and Linens 'n Things failed in 2008," said Riley.

Such lost value represents a significant portion of industry revenues. The TowerGroup estimates that lost gift card value should decline from a high of 10% of sales in 2007 to 6% in 2009 – nearly $5 billion in total.

The TowerGroup report also said that some private store gift cards will perform better than others. In the restaurant category, cards from fast food chains will do better than cards for fine dining establishments and among retailers, discounters will outperform high-end specialty stores. Gift cards of local niche players will be hurt the most.

According to Riley, issuers of private store gift cards must make sure consumers can get the full value of their gift card purchase if they hope to maintain this valuable source of revenue for their companies. He said the prepaid debit market is poised for growth next year, but retailers' reaction to the Credit Card Accountability and Responsibility and Disclosure (CARD) Act, which is intended to protect consumers from lost value due to fees and expiration dates, will determine whether the use of store gift cards will continue to decline or reverse the trend toward general use debit cards.

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