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Gift Cards in the UK: A Game-Plan for Unlocking Retail Margins

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Gift cards and vouchers have been a feature of the UK marketplace for around 90 years, and amounted to approximately £5.7 billion in 2016. The purpose and value of gift cards and vouchers has not changed much over this period, with spending still heavily centred on retail. Although year-on-year growth in revenue has remained in single digits over the last decade, gift cards are not simply an alternative payment method, but provide added benefits to both merchants and consumers. While challenges abound, some players are finding that with some innovation and investment in data, gift cards can be revitalised to provide a boost to retail profitability.

The key advantages

First of all, gift card purchases tend to be higher margin and higher value in comparison to non-gift card purchases: as the funds received on gift cards are “free” to the recipient, the ‘giftee’ is more likely to pay out of their own pocket to purchase a product at a higher price point. As a result, according to one operator, items purchased on gift cards tend to represent a larger contribution to profit than other purchases. This also means that gift cards tend to bring in revenue to the retailer that, ostensibly, would have gone elsewhere.

The gaming industry is progressively moving towards the sale of software (games, programmes etc.) in digital format. In essence, consumers will increasingly purchase closed loop cards that allow consumers to download the software as opposed to buying a physical disk. Industry experts believe Electronic Software Delivery (ESD) technology will double, or even triple over the upcoming years and contribute significantly to opportunities in closed loop gift cards. This is one of the highest growth prospect areas and one to keep an eye out for.

The long-term advantage of gift cards to retailers becomes apparent when retailers can link gift cards to redemption analysis. Retailers are able to measure actual sales, but very few are able to track what gift cards are used on and the profitability of them versus non gift-card transactions. This is yet another purpose of gift cards that highlights the need to see them as a way of enhancing sales not simply in itself, but by leveraging the information retained through gift card usage in the first place.

As it stands, B2B represents roughly 50% of the gift card market in the UK in value terms, with the employee benefit segment being the largest business driver. Increasingly, we see employers showing more interest in using gift cards, vouchers and discount schemes to supplement the more bland benefits they customarily provide to employees (e.g. bonuses, pensions, health insurance, etc.).

With the turn towards digital, there have been significant increases over the past 6 years in the number of smaller companies that have entered the industry, providing digital platform solutions for businesses to offer tailored portfolios of gift cards to employees. This delivery method is growing rapidly and allowing smaller businesses to offer cards to staff through a leaner business model and at a cost saving, due to the lack of costs related to the actual production of cards, postage and delivery. As such, digital B2B sales is one of the strongest growing areas within gift cards.

What are the challenges and how do you convert these into opportunities?

However, all is not rosy. As far as gifting is concerned, research shows that consumers in the UK are still attached to the physical presence of a gift card; most UK consumers still rather give/receive in plastic, as opposed to a code on their phones or via email. Thus, the growth fuelled by digital products within B2B is not yet mirrored within B2C.

Where retailers might have sought to increase awareness and drive uptake of gift cards with offers and discounts, this has often quickly run into trouble. Discounting on gift cards can result in major loss of margins: a discounted gift card, coinciding with any in-store promotion can easily see the retailer almost giving the items away when margins are taken into account. The lack of available data to retailers to measure the profitability of gift-card versus non-gift-card purchases is a problem. Where anecdotal evidence strongly suggests greater profitability with gift cards, far more is needed to overcome the risk aversion of major retail players.

Recommendations and forecasts

While flat discounts have had very poor results, the way forward appears to be through connecting third party gift cards to loyalty schemes. Morrisons is already trialling this in the UK where consumers earn points on the Morrisons reward scheme when they purchase Amazon gift cards.

This allows gift cards to offer added value to consumers while avoiding stripping away of margins to the same degree as pure discounting does. In principle, this is similar to store loyalty cards where consumers gain points for making purchases. In some cases, making purchases via gift cards will yield as high as four times the number of points in order to stimulate gift card sales.

Nevertheless, gift cards have been growing in popularity as more and more merchants that provide services or experiences come on board (eg Ticketmaster, Odeon). The main challenge is in getting the average consumer in the B2C market - particularly older consumers – to take up digital to the same degree as has occurred in the B2B market. To this end, the industry strategy is focusing on promoting digital gift cards for small, year-round gifts, away from just major occasions, such as Christmas.

As mentioned, gift cards have been a common feature of the UK retail market for almost a century. This comes with a whole set of issues around old legacy inventory and accounting systems that are in need of change in order to make gift cards leaner and more profitable. One key point in this regard is the necessity to move the industry standard from set price gift cards to variable loadable cards. Research shows that flexibility in gift card values yields higher spend per transaction, translating into greater profits through gift cards for retailers.

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