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TOWERGROUP'S HARD CANDY CHRISTMAS: GIFT CARD SALES TO DROP AMID FALLING RETAIL SALES; BANKS TAKE LIGHTER HIT



Merchant-Sponsored Gift Cards to Sustain First Reduction in Sales Volume, With Expected Drop of 14 Percent From 2007



Total gift card sales for the 2008 holiday season will take nearly a 9 percent hit, according to research from TowerGroup, owing largely to the downturn in the US economy.

A thin but visible silver lining remains for banks, however. That 9 percent decrease will be largely 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 client – 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 card 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 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 Linens ‘N Things and 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, disclosures, and escheatment. 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.

A new TowerGroup ViewPoint that further elaborates on the decline of gift card sales will be available in the next two weeks. To request a copy of the report when it is available, or to arrange an interview with Riley, please contact Lisette Kwong at +1.212.642.7753 or Lisette.kwong@edelman.com.

About TowerGroup: TowerGroup is the leading research and advisory services firm focused exclusively on the financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world's leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America and Europe, TowerGroup serves a global client base. Visit http://www.towergroup.com for more information.

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