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November 24, 2006

Chipping Away at the Deadweight Loss of Christmas

I took the occasion of last Black Friday to give some thoughts on the Deadweight Loss of Christmas, which I still think is an interesting phenomenon (hint: go read the post again before you go out shopping).

I also spent a couple of paragraphs on gift cards, which are good substitutes for unwanted gifts (though not perfect substitutes for either cash or thoughtful, wanted gifts). So I'm not surprised by some recent news of how popular a purchase gift cards have become. Consider the following facts:

• Gift cards will be the number one gift purchase this year, beating out apparel and electronics.
• Nearly 80% of consumers are planning to buy at least one.
• The average consumer will purchase 4.6 cards, an 18% increase from last year.
• The average consumer will put $116.51 on those cards, a 32% increase from last year.
• Analysts forecast $24.8 Billion in gift card purchases

Gift cards have obviously become more popular and less stigmatized. The interesting question is why. First, I could easily surmise that it is due to a greater awareness of the deadweight loss of gift-giving. As the marketplace proliferates (through the Long Tail), we're more keenly aware of how disappointing a gift is compared to alternatives. Second, perhaps the more we 'bowl alone,' our loved ones are also becoming worse estimators of our preferences, leading to less desirable gifts. Third, retail shopping may be becoming less pleasant compared to alternatives, so consumers seek to minimize their effort (and the efforts of receivers who would otherwise be burdened with having to wait in a return queue). Fourth, retailers may be pushing gift cards, for a variety of reasons.

But things aren't so clear-cut. According to the Deloitte & Touche survey cited above:

Despite their popularity, more people want to receive a gift card than want to give one: of those surveyed, 35 percent would rather get a gift card than merchandise; however, 22 percent say they don't like to give gift cards because they're too impersonal . . .

Less than a majority of receivers are willing to switch, meaning they have adequate givers or a strong preference for good intentions. And the great majority of givers think they can estimate the wishes of their loved ones well or disdain making a present out of a little sliver of plastic. If the trend continues, though, what will be the long-term impact of gift-giving? Will we all sit around trading gift certificates on Christmas morning?

Things are also complicated for retailers:

"Our survey showed that, as a result of buying gift cards last year, 50 percent of consumers spent less time shopping during the holidays and 41 percent bought fewer spontaneous, spur-of-the-moment items," continued Conroy.

Yet, retailers can also charge recipients higher prices when they return to make purchases after the holiday sales. What's more, those spenders will often make purchases that exceed the face value of the card:

The additional sales generated by the cards can be significant. At Target Corp., the country's second-largest discounter, customers redeeming cards spend an average of $43 per transaction, $27 with the card and $16 out of their own pockets, Virginia Genereux . . . wrote in a Nov. 20 report. "We see the incremental sales volume from gift cards likely driving sales upside in the January quarter,'' she said . . .

For the past 10 years, January has recorded the biggest sales growth, an average of 5.7 percent, during the three-month period from November to January, because of increased gift-card use, according to Deloitte & Touche.

But there is one other outstanding feature of gift cards that almost totally negates the dent they might make in the Deadweight Loss of Christmas: the fact that so many of them go unredeemed.

Companies including Home Depot, Limited Brands and Best Buy Co. increased profits in the past year and a half with revenue from unredeemed cards.

About $8 billion of gift cards may not get used this year, said Brian Riley, an analyst at Needham, Massachusetts-based research-firm TowerGroup Inc.

That's nearly a third of the total projected gift card value. A great reminder to check your drawers, purses, wallets, and -- especially -- that Christmas morning refuse for any stray gift cards.

Posted by Zach Wendling at November 24, 2006 07:51 PM

Comments

Posted by: Joshua Claybourn at November 25, 2006 09:47 AM | permalink

Posted by: David Darlington at November 25, 2006 07:38 PM | permalink

Posted by: Eric Seymour at November 27, 2006 09:50 AM | permalink

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