NEEDHAM, Ma. — Total gift-card sales for the 2008 holiday season will take a nearly 9-percent hit, according to research from TowerGroup, owing largely to the downturn in the U.S. economy.
A thin but visible silver lining remains for banks, however. According to a news release, that 9-percent decrease will largely be due to an expected 14-percent decline in the sales of merchant-sponsored (also "closed-loop" or private-label) gift cards. Sales of bank-sponsored (network-branded) gift cards are expected to increase 5.6 percent, a positive showing in the current climate.
TowerGroup forecasts that the significant declines in the merchant-sponsored label gift-card sector will be driven by a decrease in retail sales, lack of consumer confidence in retailer-sponsored gift card products, and — perhaps most important in the current climate — a shift to branded products from financial institutions which permit the gift card to be used on consumable products, such as groceries and gasoline.
Brian Riley, research director in the Bank Cards practice at TowerGroup, notes the following:
TowerGroup projects that 2008 sales of both financial service institution-branded and private-label gift cards will total $88.4 billion, a combined decrease of 8.9 percent as compared to 2007. Private-label gift cards will decrease by 14.4 percent, while branded cards from financial institutions will experience a modest growth rate of 5.6 percent.
Private-label gift cards should generate $59.9 billion in total sales through the 2008 year end, as compared to $70 billion in 2007. Branded cards from financial institutions are expected to grow to $28.5 billion in total sales in 2008, versus $27 billion in 2007.
TowerGroup expects consumers to become more sensitive to the potential risk of failures in the retail industry that expose private-label gift cards to value loss in the event of bankruptcy. The sensitivity to this issue heightened in 2008 following the bankruptcies of CompUSA, Linens 'N Things and The Sharper Image, where more than $100 million in gift-card value became compromised in the wake of retailer filings.
TowerGroup expects an increase in use of financial institution-branded gift cards permitting access to branded payments networks such as MasterCard, Visa, Discover and American Express. Financial institution-branded cards allow gift-card holders more discretion relative to where a card is used — either to take advantage of a holiday season that will most likely offer deep sales discounts, or to purchase more practical items such as food, gasoline and other consumables.
TowerGroup notes that, to date, 36 states have enacted legislation to address private-label gift card issues such as expiration, fees and disclosures. Early indications are that these protections, along with awareness that the product is not intended to be a savings device, will further drive down unused card value — from $8 billion in 2007 to $6.4 billion by year-end 2008.
