Some companies have practically mastered the gift card industry. They sell so many gift cards that they become known for them as much as the actual products and services they sell. Starbucks is one such company. According to Julia Layton on HowStuffWorks.com, the widely popular coffeehouse chain sold nearly 2.5 million gift cards in the U.S and Canada on Christmas Eve of 2014 alone.
“The company says one in seven Americans received a Starbucks card for the holidays that year,” she reports. And things certainly haven’t slowed down for Starbucks. “Starbucks gift cards and mobile debit accounts stored $1.2 billion in customer funds during the first quarter of 2016…Starbucks has pretty much mastered the prepaid realm,” Layton continues. It’s clear that gift cards themselves have become popular Starbucks products.
Evidently, a large number of North Americans feel that a trip to the coffeehouse makes for a great present. Not everyone is redeeming their cards, however. And this makes for a great present for Starbucks. Gift cards that go unredeemed still represent revenue for businesses. Layton reveals that, in 2014, over 2 billion gift cards were sold in the United States for a total of $124 billion.
“And of that $124 billion, $750 million, or 0.6 percent, was never redeemed,” she writes, “The industry jargon is ‘breakage’ — money left on gift cards indefinitely, which the issuers eventually claim as revenue. It\’s a huge moneymaker. In 2008, the year before the CARD Act established new regulations for expiration dates and fees, gift-card breakage was about $7 billion, or roughly 7 percent of total purchases.”
What that means is when retailers sell gift cards, they essentially receive interest-free loans. They generate revenue by being paid for products and services that haven’t actually been provided. Not yet, anyway. And in the cases when the times to provide those products and services never come, companies essentially get free money. This is true even if the cards do get redeemed. In many cases, gift cards are redeemed for only a portion of their values.
“A person with a $100 gift card may purchase a $98 item and throw the card away or toss it in a drawer, never to be seen again,” James Sullivan of The Motley Fool explains of breakage, “When this happens, the retailer delivered $98 of products for $100 in revenue. This helps with margins.”
“The fact that 65 percent of people end up spending 38 percent more than the card\’s value probably helps with margins, too,” adds Layton. “The gift-card market will likely continue its rapid expansion. There\’s just no downside for businesses, and analysts expect spending to hit $160 billion by 2018.”
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