Article

How to Use Gift Cards to Boost Sales & Cash Flow

They seem to be everywhere. Nearly every major retailer offers them. More than likely, you or someone in your family has purchased or received one.

They are gift cards, essentially debit cards bearing a merchant's logo that are preloaded with a dollar amount for purchases at the merchant's place of business. As their moniker indicates, the cards are appealing and popular gift items. Gift cards are more thoughtful and personal than cash, since the giver at least recognizes the recipient's favorite retailer or restaurant. But gift cards relieve the giver from choosing a specific gift, which is never an easy task, and might explain why daily gift card sales spike during the last few days before December 25.

Type "gift card" in your Internet browser search engine and you are deluged with businesses that offer gift cards, and companies that sell, process and offer services and equipment for gift card transactions. In all the hoopla, there is little wonder why restaurateurs, both independents and chains alike, are rushing to jump on the gift card bandwagon. The statistics match the apparent ubiquity of these cards. In a study, 40 percent of all U.S. shoppers purchased gift cards totaling more than $50 billion. This figure doubled the previous year total, when only 20 percent of the shoppers purchased these cards. So estimates Howard Davidowitz, chairman of Davidowitz and Associates, a national retail consulting and investment-banking firm, as quoted in the Houston Chronicle.

. . . gift card proponents cite a litany of advantages to businesses that offer them. These include improved cash flow, as the merchant is able to collect payment before delivering the product or services. Other advantages include building brand awareness and creating customer loyalty.
- Joe Erickson

In addition to swelling consumer interest, gift card proponents cite a litany of advantages to businesses that offer them. These include improved cash flow, as the merchant is able to collect payment before delivering the product or services. Other advantages include building brand awareness and creating customer loyalty. For example, gift cards can be "reloaded," which keeps the customer returning to the business. Moreover, if the customer has an unused balance on the card, he will usually return to use it. Finally, as with all electronic purchases, gift cards increase the ease, accuracy, and detail of management sales reporting.

Naturally, restaurateurs who sell gift cards benefit handsomely from the boom in consumer gift card purchasing. However, along with the boom comes increased competition for the consumer dollars being spent on gift cards. Competition between all merchants, including restaurateurs, is already intense in the gift card arena. According to Paymentech, a Dallas-based electronic payment company (credit cards, debit cards, and gift cards), the number of merchant locations using its gift card processing service increased 80 percent over the previous year. Restaurateurs also compete against the marketing clout of the world's largest financial institutions such as Visa and American Express, which have their own gift card programs.

Starting a Gift Card Program

How does an operator implement a gift card program? What are the gift card options available and which one should you choose? How do you integrate the selling and redemption of gift cards into your operation? Moreover, where do you get those cards anyway?

Before these questions can be answered, you must first consider the many aspects of your individual operation that will affect your selection. For instance, a table-service restaurant selling gift cards has more to consider than a quick-service or counter-service establishment. Likewise, chain stores and multiple location concepts may need a centralized method of gift card processing to enable the cards to be used at all locations. What about your point-of-sale (POS) system; how hard is it going to be to integrate gift cards?

Let us first consider your type of operation. Counter-service and fast-food concepts usually have less to consider than table-service operations. The customer will usually purchase and redeem the cards with the cashier whereas many table-service restaurants allow the server to both sell and redeem the cards as part of the server banking system they employ.

First, Answer These Questions

The operator must also take into account several logistical problems. These include:

• Who has access to the gift cards? Selling gift cards requires the merchant to inventory the cards available for sale. The cards should remain in a secure area with managed access. This can present a problem when a customer wants to purchase a gift card at 7 p.m. on a Friday. Management should devise a system that allows a certain number of gift cards to be available at any time. Assigning a small stock of cards to the hostess, cashier or bartender will allow the cards to be sold without having to interrupt the manager.
• Can the customer get cashback when they redeem the card? In most cases, merchants don't give change back for the unredeemed amount of the card. However, some operators, such as the Pappas® Restaurant Group based in Houston, have been known to give change on the unused portion. This feature is limited by some POS systems. Be sure your POS has the ability to record split payments as well as properly regulate change given.
• Can the gratuity be paid with the card? Most full-service restaurants allow gratuities to be paid by the gift card. Again, you must verify that your POS system properly handles gratuity. Unlike credit card terminals or programs that are programmed to adjust gratuities after the customer has left, gift card tendering in most POS systems does not prompt for gratuity.
• Was the gift card paid for or is it a promotional card? Many operators use gift cards for promotional purposes as well as for purchase. This presents an accounting problem when the same type of gift card is used for both purposes. Some states, such as Texas, require that the restaurant pay the sales tax on the cost of the goods used as 100 percent giveaways. Be sure to check with your accountant to devise a proper tracking method.
• If it is a promotional card, are you going to prohibit discounts? Cards that are given away or sold at a discount already have cost the operator. Further discounting your products and services, such as a "buy one and get one free night," decreases your usual profit. Careful consideration should be given to your policy to allow already discounted gift cards to apply their full face value against discounted specials. The result may sometimes cost you more than you intended when you first issued the card.
• Will the gift cards be sold at a discount? Many restaurateurs sell gift cards at a discount to promote their sale. Your POS system needs to accurately reflect the transaction at the time of sale. Some POS systems are simply programmed with a discount feature that discounts the retail value of the card before applying the payment for it. For instance, a newly issued card of $50 is rung up as a $50 gift card sale. A 10 percent discount is applied and the customer pays a balance of $40. Again, be sure to check with your accountant for the proper recording of discounted gift card sales.

These questions need to be answered before you begin selecting your method of gift card processing. Naturally, the more restrictions you put on the redemption of gift cards the harder it becomes to find a card processing system and the more difficult it will be to integrate that system into your point of sale. Implementation of a successful gift card program will involve selecting a gift card processing service or program, a graphics designer or service, and a card printing service. Additionally, you may need to involve your POS provider.

Using a Gift Card Processing Service

Multiple locations usually require that the gift cards be redeemable at any location. This means the gift card system you use needs a central processing system. Many of the credit card processors offer gift card production and processing.

"Most credit card processors now offer gift card services," said Chuck Saden, president and founder of POS Card Processing (poscardprocessing.com). Some benefits that are offered by gift card processors include the ability to have automatic inactivity fees and expiration dates applied to the card. Gift card processors also offer reporting services over the Internet. Paymentech representative Blair Smith recommends that merchants use the Internet to check balances of cards rather than swiping the card. Internet reporting is usually a free service whereas checking the balance through the terminal results in a transaction fee.

Selecting a Card Printing Service

Most credit card processors offer design services and printing of gift cards. Some insist the merchant purchase the cards through them while others allow the merchant to purchase cards directly from the card printing service. Many factors, including the number of colors to be printed, embossing, encoding, card thickness, and the quantity of cards being purchased determine card prices. Card prices can range from about 25 cents to over $1 per card. Additionally, there may be fees for artwork, design and setup costs. Cards can be printed in one, two or four colors and are then encoded with random account numbers in the format specified by the processor. Random account numbers are essential to the prevention of fraudulent cards. Each processor has programming requirements for the magnetic encoding on the cards. Incorrect encoding will prevent the cards from working and most likely leave the merchant with an inventory of useless cards. It is preferable that the card manufacturer has experience producing cards for the processor you select.

Our research found that the typical restaurant ordering gift cards for the first time orders 500 cards for which they pay about $1 each not including artwork and design. Increasing the order to 5,000 cards reduces the cost to about 50 cents per card. For their purchase, they will receive a card that has been printed on both sides in four-color quality. Marcia Simon of Continental Plastic Cards in Florida recommends that merchants select their own graphics design company to design their cards, one that is familiar with the design standard of the restaurant. The card printer can provide recommendations for language to be printed on the card. Most card printers offer design services for an additional charge. Some have predesigned cards that are personalized with your restaurant name.

What About Your Point-of-Sale System?

Another major consideration when selecting a gift card program centers on your point-of-sale system. Few of the leading POS systems have a gift card program built into their systems, but many others offer upgrade modules to perform this function. In either case, having a gift card processing feature is especially valuable to table-service restaurants that rely heavily on their POS system for order preparation and guest tracking. Having the gift card program integrated into your POS system allows the server to sell and redeem cards from any of the POS workstations. There is also no need to buy additional equipment and telephone lines. In most cases, the POS system will already have magnetic card readers to accept credit cards. Processing gift cards requires the same modem device or program already present on the POS for processing credit cards. Other leaders in POS systems have also developed relationships with gift card processors that allow gift cards to be sold and redeemed from their POS systems.

Operators seeking to accept gift cards should first check with their local POS provider before deciding which gift card program to use. Many of the POS dealers already have the experience and resources to incorporate gift card processing. Brian Smith of CRS Texas, a POS dealer based in Houston, said, "We try to be a one-stop provider to our customers. We don't just sell and install POS systems, we also provide the gift cards and gift card services for them." In fact, your POS dealer may be able to incorporate gift cards that do not require a gift card processing service. Many of the POS systems already have customer tracking and accounts receivable modules built in. The gift cards are treated the same as a customer card or employee debit card. The accounts are simply prepaid when the card is sold and charged whenever the card is used. This type of gift card implementation has obvious savings to the operator because there are no transaction fees for processing. Card history is easily accessible and accounting of gift cards is simple.

Run the Numbers

The most important consideration you have is to determine if a gift card program is cost-effective for your operation. Let us assume that the cost of design and card production ranges from $1.25 to $2 per card for your initial card order. Add to that the transaction fees, which may range from 60 cents to $1 per card over the life of the card. There is a significant cost difference between selling $10 gift cards as opposed to a $50 card. Also consider that you may need to discount your card to promote sales. Remember that gift cards are simply a tool to promote sales and increase traffic, and you still have to consider the prime costs of the meals for which they are being redeemed. However, bear in mind that many in the gift card industry believe as much as 10 percent to 20 percent of all gift cards go unredeemed. Careful tracking of unredeemed cards in your establishment can help you better analyze the real cost of selling gift cards.

Some operators view the costs of producing gift cards as a marketing expense. Traditionally, patrons using gift cards will usually spend more than the gift card amount. There is plenty of indication that gift card purchases will continue to grow. Operators wanting to take advantage of this consumer interest might need to jump on the bandwagon now.

Selecting a Gift Card Program

1. Make a list of your specific requirements.
2. Ask your POS vendor about gift card options.
3. Decide if you need a gift card processor or an in-house program.
4. Select a card printing service that has experience with the processor or program you select. Many processors will print them for you.
5. Select a graphic design source. Some processors and printers offer this service.
6. Do a cost analysis before making a final commitment.

Gift Card Investment and Cost Breakdown

• Cards $25 to $100 per 100 cards
• Equipment $400 to $600 per terminal
• Cost to activate/redeem 25 cents to 40 cents per transaction
• Additional fees $5 to $25 per month