Good news for open loop gift card market
Prepaid gift cards, especially open-loop products, appear well positioned to benefit from a desire by recession-weary US consumers to ‘reclaim’ Christmas.
Mercator Advisory Group predicts that dollars load on closed loop (private label) gift cards will increase slightly this holiday season (fourth quarter) by 1.9% over the 2008 holiday shopping season. Meanwhile, dollar loads on open loop (network branded) gift cards may increase by as much as 50% over the same quarter last year.
Open continues to take the lead
Marecator says that its year’s annual open and closed loop benchmarks, which track the dollar loads on prepaid cards in 33 segments, find that in 2008 the open loop gift card market grew 54% to $7.8 billion, up from $5.03 billion in 2007. This is 16% off the prior year’s (2007) growth rate of 70 percent. It can be argued that this slower growth rate is the result of a soft holiday season. The analyst has forecast $11.8 billion being loaded onto open loop gift cards in 2009, representing a 50% increase from 2008.
Taking these figures, it is estimated that 60% of the dollars loaded onto gift cards annually occurs in the fourth quarter of the year – with the highest level of loads occurring days before Christmas as inventories run low and consumers make last minute decisions on holiday gift giving. This assumes consistency in the seasonality of gift card sales. Any variation from the considered norm of course will have an impact on this prediction.
Applying the 60% estimate, it appears that of the $7.8 billion loaded onto open loop gift cards in 2008, $4.6 billion of that amount likely occurred during the fourth quarter. Of Mercator’s forecasted 2009 load of $11.8 billion, it determines that $6.9 billion of that amount will occur in the fourth quarter. This is an optimistic prediction. The worst case scenario that assumes consumers remain pessimistic, but which does not account for any horrific news event (a major financial institution closes, the stock market implodes, a payment related scandal erupts) Mercator predicts a still healthy 35 % percent increase for the year and the quarter for open-loop gift cards.
The ongoing story in prepaid is that open loop continues to gain momentum, becoming a greater solution for cash and check replacement. In several prepaid segments open loop surpasses closed loop dollar loads, which have historically been higher. As it relates to prepaid holiday gift card sales, open loop benefitted in 2008 from the economic downturn as some consumers, reluctant to purchase a closed loop card due to concerns over potential merchant bankruptcies, turned to open loop cards as a safer bet.
Also, consumers are coming to appreciate the flexibility open loop cards offer, allowing recipients to select the gift that best suits their needs – even if the funds are spent on gas, groceries or other practical purchases. With more retailers minimizing inventories it is likely there will be more out of stock situations earlier this season and a reduced category choice, making gift cards well positioned as a viable alternative to sold out targeted merchandise purchases.
Closed lags behind but is not forgotten
In Mercator’s closed loop estimates and forecast, in-store gift card sales slowed from 14% in 2006 to 7.5% in 2007 and tumbled to 1.8% in 2008 with $62.23 billion being loaded onto the cards. The rate of decline suggests that the largest merchants that have been marketing their gift card programs for several years may have reached something close to saturation. Any substantial growth comes from the few large and mid-size retailers that have only recently started to heavily market their programs and through growing distribution through prepaid malls.
In 2009, is is estimated that closed loop in-store gift cards will experience a 1.9% increase reaching $63.4 billion in dollar loads. Again, applying the 60% fourth quarter average it is estimated that $38 billion will be loaded onto the cards this holiday season, staying consistent with a forecast 1.9% increase for 2009.
The closed-loop estimate falls in line with recent transaction reporting from First Data. The payment processor reported a 17.8% increase in the total dollars loaded onto closed loop gift cards on Black Friday. While this number at first seems impressive, the scanty 1.8% growth rate for these products in 2008 must be taken into account, which means any significant spike creates a significant percentage increase for any given day during the shopping year. First Data, even in its reporting of this single day increase, is forecasting that the dollars loaded on closed loop gift cards this holiday season will be “flat or grow up to 5%” from the 2008 holiday season. That places the forecast of 1.9 % almost squarely in the middle of First Data’s forecast.
Some good news this year is that the bankruptcies that characterized early 2009 are unlikely to be repeated this year, which bodes well for closed loop gift cards. One interesting finding; despite the 2008 bankruptcies, consumer did not broadly avoid closed loop cards, but instead became more selective of the retailers they chose, according to Mercator’s Primary Data Series research. The Primary Data Research series is based on a national sample of 1,012 online consumer survey panel with survey responses completed between May 28 and June 4, 2009. The prepaid primary data indicates that 45% of survey respondents report having purchased a prepaid cards in the previous 12 months. Within this group, three out of four recalled purchasing specific retailer gift/prepaid cards, which our data reflects is by far the most commonly purchased prepaid card type. And at $62.23bn in 2008, the closed-loop in-store gift card market segment continues to be the largest single prepaid segment.
Overall, the primary data shows that consumer appeal for gift cards is undeniable, having gained cultural acceptance, and achieved superior preference over cash and checks as gifts. General purpose cards are also prized in gifting situations due to their ultimate flexibility to the user. And, over half of prepaid buyers agree these cards have become a better gift in the current difficult economic environment.
Looking for good news
November and December began showing signs of an easing unemployment rate and falling jobless claims, both of which are reportedly having a positive impact on the consumer sentiment index (which admittedly swings as wild as the stock market on a news filled day and as a standalone is challenging to use as a metric).
An increase in US retail hiring occurred in November. The 68 retailers representing the 27,034 distributed locations across the US that make up Kronos Retail Labor Index, reported in November an 8.49% increase in hires over October. This followed a 13.31% increase from September to October. November’s seasonally adjusted figure represents the highest level of hiring so far in 2009. Consulting company Challenger, Gray & Christmas also show a 37% increase in retail employment for November. This reflects an optimistic outlook by some retailers.
Holiday store spending totaled $10.6 billion on Black Friday, up only 0.5% from the previous year (up none the less) according to ShopperTrak RCT Corp., a research firm that tracks sales at more than 50,000 stores.
“Cyber Monday” reached $887 million in online spending, up 5% versus year ago according to ComScore and other research firms. This is good news for prepaid issuers that leverage the online channel, which has been providing gift cards with significant traction. Online aggregators such as eBay reported an increase in prepaid card sales since October compared to the same time last year – again showing that increased gift card sales are closely associated with an aggressive distribution strategy.
For the first 30 days of the online November-December shopping season, it’s reported that total sales were up 3% to $12.26 billion, compared to the same period in 2008, according to market-research firm ComScore, which monitors holiday spending. As of Dec.14, that number has grown to $20 billion.
Consumer confidence climbed in November and December and is now more than twice as strong as it was a year ago, according to recent results by the RBC CASH (Consumer Attitudes and Spending by Household) Index.
First Data’s ‘SpendTrend’ transaction data for the month of November reflects a 8.9% growth over the same period last year in same store consumer spending via credit, signature debit, PIN debit and EBT cards at U.S. merchant locations.
Gift card sales growth is linked to consumer spend; a primary driver for high prepaid growth is the diversion of consumers’ traditional use of cash, checks, and merchandise for gifting over to prepaid cards. So while economic data being reported for this year’s holiday shopping season does not reveal a complete reversal from last year’s dreary fourth quarter, there are indicators that things are improving somewhat and consumers maybe a little more jollier with their wallets – while also diverting more of their spend to prepaid.
Savvy retailers looking for improved sales this year, beyond discounting are leveraging prepaid gift cards to increase foot traffic through special incentives such as spend $100 and get a $10 gift card; buy four gift cards and get the fifth free. The same holds true for issuers of both open and closed loop gift cards who are offering discounts on bundled purchases, and in the case of open loop, directly attacking post purchase fees that have prevented some consumers from buying the cards by dropping the fees.
But , according to Mercator, at this stage in the game it really boils down to retailers and their ability to successfully promote and leverage the cards. Based on interviews it has done with retailers and prepaid distributors, ithe analyst says it is clear that clever marketing and ingenuity that leverages the cards to increase foot traffic and increase sales can go a long way. Even strategically placing the cards on the sales floor can result in a small increase in sales while more aggressive incentives have been shown to boost sales by more than 300%.
This is not to say that issuers shouldn’t also be considering how they can better promote their gift cards in three distribution scenarios: in-store, merchant web sites, and prepaid mall distribution.
As a standalone product, prepaid gift cards already appear to be a popular purchase this holiday season. When asked how the cards were doing this year, in a handful of personal interviews done with Massachusetts store managers for some of the largest prepaid malls, statements such as “the cards are a hot item,” “they (consumers) really like the cards” and “there is a lot of activity around the cards,” were made. Mercator admits this word on the street approach can’t be seen as validation that the cards will hit its predicted marks, but adds “it does make us feel more secure in our optimism. It also serves as validation that gift card malls continue to have a significant impact on prepaid gift card sales. While open loop gift cards saw a large boost in late 2008, the growth rate was even higher at gift card malls, where some major retail outlets reported growth rates in excess of 100%.”
Although prepaid malls have experienced significant overall growth, much of this growth comes from sales in new locations or through the addition of new categories. As such, this growth primarily benefits strong brands that are expanding their distribution into new prepaid mall locations. However, those issuers that have already saturated the prepaid mall distribution channel will find it harder to offset slow in-store sales with new growth out of the prepaid mall channel.
While prepaid gift cards have grown in popularity and more consumers have had experiences, either as a receiver or purchaser of the products, it is interesting to observe how dependent a segment can be on a specific sales cycle.
Considering gift cards dependence to holiday sales for annual growth, year over year gift cards have performed well, even in a down economy. Mercator says it remains optimistic that this year’s gift card performance, especially open loop, will not disappoint.