Weaker gift card demand to hit post-holiday sales

By Nicole Maestri - Analysis

NEW YORK (Reuters) - The once-hot holiday gift card may be losing some of its luster, dealing a setback to struggling U.S. retailers who count on the cards to drive consumers into stores for a post-Christmas shopping spree.

As shoppers have witnessed a slew of retail bankruptcies this year, they are showing some reluctance toward buying the cards as gifts for friends and family.

And with retailers already rolling out tremendous discounts to entice consumers to spend their limited dollars, shoppers may find they can buy presents this holiday for less than what they were planning to spend on a gift card.

"We do see a decline in the demand for gift cards," said Darrell Rigby, head of Bain & Co's global retail practice.

Consumers "may be able to give a gift with higher perceived value by getting actual merchandise than by just giving a gift card," he said.

Roughly 10 percent of sales during the November-December holiday season happen the week after Christmas, according to the National Retail Federation. But weaker gift card demand could make ringing up those sales, in an environment where shoppers are already loath to spend, an even bigger challenge.

Over the past few years, retailers have rushed to display new merchandise in their stores the day after Christmas, hoping to attract shoppers flush with new gift cards.

Shoppers were expected to spend an estimated $26.3 billion on gift cards last holiday, according to the NRF, up from $24.8 billion in 2006 and $18.5 billion in 2005.

BANKRUPTCIES UNDERMINE GIFT CARDS

Demand for the cards soared as more companies, ranging from retailers and mall operators to websites, sold them and shoppers saw them as a quick and easy gift idea.

Retailers could plan on consumers using the cards either to splurge on full-priced merchandise or to spend well beyond the value of the card, helping to bolster their profits.

But this year, consumers have watched as a slew of retailers, including Sharper Image, Linens 'n Things, and Mervyn's, have filed for bankruptcy protection, placing millions of dollars of unused gift cards into question.

While retailers will often ask the bankruptcy court for special permission to continue accepting gift cards once they have filed for bankruptcy protection, that permission can go out the window if a retailer liquidates stores and closes its doors.

After Sharper Image filed for bankruptcy it initially stopped accepting its gift cards. The retailer then said it would honor the cards if shoppers redeemed them in full and also purchased an item that cost double the value of the card.

Fear that a retailer will go out of business is prompting shoppers to shy away from gift cards, according to a survey by America's Research Group conducted for Reuters.