Article
In The Cards: The Fundamentals of a Successful Independent Restaurant Gift Card Program
Gift cards made sense for a socially distanced holiday season in which families may not have been gathering or shopping in stores at volumes comparable to years past. Gift cards have been widely recommended as a way to support favorite local businesses. As you make your way through the pandemic, you should take advantage of public sympathy for independent operators and the goodwill of your guests.
Most independent restaurateurs know the value of a good gift card program. They've been around a long time in all types of retail services. But establishing one that is easy to execute while accomplishing three key objectives can be more difficult than it appears. There are a variety of ways to establish and promote gift cards and customizing your restaurant's program is especially important.
While gift card sales tend to peak during the holiday season, there's never a bad time to get started with a gift card program, extend your gift card program with online sales, or rethink the way you're promoting restaurant gift cards.
The benefits include adding another revenue stream for your concept. Second, it increases loyalty by giving customers a reason to return to your concept. And finally, it provides cash flow prior to redemption, which can be a boon to business as long as you and your accountant are tracking sales and liability properly. (See "Gift Card Accounting and Legal Issues" below)
Moreover, gift cards are relatively inexpensive. All you need is a plastic card with some branding, and perhaps a one-time graphic design expense associated with creating your gift card template. Many restaurants use on-line purchase sites such as "Instagift" where guests can purchase and printout or use their smartphone to make the purchase.
Where to start? Well, point-of-sale systems support different physical gift card programs, so operators should check with their vendor first to better understand gift card integrations and any costs associated with design and printing. A good estimate is $0.50 to $1 per card for a plastic card printed front and back with four colors. The card's cost is usually based on the number ordered at any one time, i.e., ordering 500 cards versus 100 costs much less per card. With the proper degaussing equipment, a card in good shape can be erased and used again.
POS systems often include gift card integrations that make it easy to run a range of reports, so you can dig into the data to understand trends and patterns. With a few clicks, you'll be able to check things like how many gift cards were sold during a specified time frame, how many gift cards are unredeemed to date, and gift card redemption rates.
POS systems, including Square and Toast, and now many card processors, allow operators to create digital gift cards that are personalized with a logo from the central dashboard. The digital versions of gift cards are an increasingly popular supplement to physical gift cards. Digital cards have no upfront cost to you. Digital cards are also easier for customers who are paying from their device or ordering on-line. You may see sales rise when customers can purchase gift cards 24/7 directly from your website.
Since gift cards can be issued in any amount a consumer wants, and don't expire for several years, they're the ideal customizable last-minute gift for any occasion, even for treating oneself. And, as Mark McDonnell, founder of LaSalle Grille in South Bend, Indiana, realized, there's free money in the percentage of gift cards that are lost or never redeemed.
"Breakage" is the industry's term for the unredeemed gift cards. Across all industries, the breakage rate is around 2-4 percent, but many in the restaurant industry experience higher percentages of unredeemed gift cards. (Again, see "Gift Card Accounting and Legal Issues" below.)
Year-round Marketing
Gift cards will always be popular around the holidays, as that's when most people are looking for gifts for oth- ers. This year, McDonnell noticed outsized gift card sales ("$10,000 in gift cards at a time," he estimates) from companies that were giving all of their workers gift cards since they weren't able to host the traditional company Christmas party.
While you'll probably get a Christmas season bump in gift card sales without marketing, finding ways to promote gift cards throughout the year can steadily grow sales while reminding customers of your gift card offering. Without a marketing plan, you'll just sell gift cards when someone asks whether you offer them -- and while that's fine if you don't need the revenue, you're unlikely to realize the benefits of a gift card program if sales are only occasional.
Your biggest sales liaisons are your employees who can mention the gift cards directly to customers before the holiday season or other times when you are actively promoting gift card sales. Employees interacting directly with customers at the bar, at tables, or when handling a takeout transaction are your sales force. Coach employees on a script to soft-sell gift cards during these interactions.
Put up signage advertising your gift cards in common areas of the restaurant, from the bar area to the host stand to the classic fishbowl giveaway, where someone can win a gift card by opting into your email marketing program. These signs can contribute toward the so-called marketing "Rule of Seven", which states that a customer needs to see something seven times before they buy. Don't forget to remind guests with bill holder stuffers and with a bottom notation of their dining checks.
When you keep your gift cards top of mind through signs and employee scripts, regular customers are more likely to think of a gift card when they need a last-minute gift. But you'll also want to consider ways to lure in people searching for restaurant gift cards in your location who may not be familiar with your concept.
Search engine optimization or SEO is a low-hanging fruit for advertising gift cards to those who aren't yet regular customers. By using local SEO keywords on your website (a concept description plus "gift card" and your town name), you can position your website to show up on the first page of search results when someone is looking for a restaurant in your community that offers gift cards. This may be of use when relatives are looking to buy restaurant gift cards for family members and may need Google's help to identify matching restaurants.
If you're offering digital gift cards, create a sales page on your website that is keyword-rich. This page will do double duty, attracting a new audience through SEO and allowing customers to purchase gift cards anytime they want. Making cards always available increases sales because you won't lose out to sales that happen after business hours.
Social media is a natural place to promote gift cards; you'll reach your built-in audience and, if you spend to promote a post, other local users who may not yet be familiar with your concept. McDonnell uses social media to promote gift cards, but estimates that he gets a bigger push from the restaurant's newsletter, which goes out to an audience of 7,500.
One thing McDonnell doesn't do is advertise his restaurant's gift card program using traditional channels. A local competitor "bought a newspaper package and had billboards up," but McDonnell didn't want to spend on radio, television, newspaper, or other channels to spread the word about his brand. LaSalle Grill is a fine dining restaurant, and he worried that it would cheapen the brand to market it aggressively.
McDonnell says he was tempted to get his restaurant gift cards into the local Costco, which is another way to expand the potential market for restaurant gift card sales. "Costco customer demographics are [similar to my audience]," he says, so it seemed promising. However, he had a change of heart at the last minute, upon reviewing the contract and considering how his concept would look when placed in a Costco kiosk alongside gift cards from chain restaurants that aren't in the same caliber as his concept. He was nervous about cheapening the brand by association, and he didn't like the way the contract favored Costco.
Another issue with the discounted cards sold at major retailers such as Sam's Club or Costco. If a local customer comes to the restaurant to purchase a $100 gift card, later goes to Costco and sees they can buy the same card for $75 it can create hard feelings and hurt your brand. It may be better to explain that your gift cards are also available at 'such & such a retailer at a lower cost.' Most times the card purchaser will thank you for your honesty and continue with the full purchase price because they don't want to send the extra time traveling to the store where the discounted card can be purchased. Or they will ask you for the store price which saves you the commission taken by the mass retailer.
After his experience with Costco, McDonnell decided to take care of his own marketing with the help of a social media marketer he pays for assistance. This way, he's able to retain control of not only gift card marketing, but customer perception of his brand.
While gift cards are always available, McDonnell runs special promotions throughout the year to boost sales. His most popular special is a $100 gift card discounted by 30 percent. McDonnell says he's tried the "extra card" discount where someone gets a smaller $20-$30 card when they purchase the $100 card but "it didn't produce half the sales." His audience wanted the discount built in up front, so once the data confirmed that preference, he stuck with the percentage off mode for gift card sales.
McDonnell always runs a 24-hour flash sale the Monday of Thanksgiving week. This year, he ran a Black Friday-Cyber Monday discount of $25 off gift cards, then offered 20 percent off gift cards through- out the month of December. At his marketer's suggestion, he ran one final sale, a pop-up from December 23-24 where customers could save 30 percent on gift cards. This final sale delivered $25,000-$30,000 in sales, he estimates.
By running flash sales on gift cards, McDonnell knows he's created a group of people that will only buy a gift card when it is on sale. That's a risk he's willing to take now, because the discounters are balanced out by those who buy cards at full price. However, he wouldn't recommend that new operators discount gift cards until their concept has proven itself.
"Establish your price integrity first and focus on your execution to build that base," he suggests. When operators maintain a focus on putting out great food, they will build customer loyalty and encourage repeat visits. Cultivating an audience of people who know your food is "worth it" means they'll recognize what a great deal your gift card offer is and opt-in.
When discounting gift cards, McDonnell never uses the word "coupon." Coupon can be a loaded word; in McDonnell's experience, it tends to bring in "cheapskates" who "you'll never please."
If you're offering digital gift cards, create a sales page on your website that is keyword-rich. This page will do double duty, attracting a new audience through SEO and allowing customers to purchase gift cards anytime they want. Making cards always available increases sales because you won't lose out to sales that happen after business hours.
Just as McDonnell keeps an eye on the competition to see what not to do, he monitors gift card sales data to determine whether to tweak an offer- ing. Email notifications come in whenever someone buys a gift card. McDonnell recalls waking up the morning after a f lash sale launch to discover a stream of email notifications about sales. If sales aren't what he hoped, he'll consider changing the terms of the deal, but decades in business have given him an accurate understanding of what his customers respond to best.
POS systems often include gift card integrations that make it easy to run a range of reports, so you can dig into the data to understand trends and patterns. With a few clicks, you'll be able to check things like how many gift cards were sold during a specified time frame, how many gift cards are unredeemed to date, and gift card redemption rates. If your concept has multiple locations, you'll be able to click through reports for each location to track bigger-picture trends or see whether gift cards sold at one location were redeemed at another location. POS data can generally be exported as a .csv file for accounting purposes as well.
By tracking gift card sales, you can see how the community responds to different offerings, better un- derstand your concept's breakage percentage, and get an idea of the discounts and marketing strategies that drive sales at your concept.
While gift cards do offer an additional revenue stream, there is a risk for operators if customers rush to redeem them during a narrow window. Gift card revenue comes in up front when the card is purchased; when it's redeemed, you're serving food that's already been paid for. While many customers overspend the gift card amount, there's never a guarantee.
McDonnell says he was worried about a cash flow crunch when the restaurant reopened after last year's pandemic shutdown. His restaurant had sold a lot of gift cards and had not accepted gift cards for takeout orders. He knew wouldn't be able to cover the cash flow if everyone redeemed at once due to pent-up demand. Fortunately, "they've been redeemed evenly throughout the year," he says.
Memorable Deal Offerings for Your Unique Concept
After COVID-19 closed down indoor dining in Colorado, "we sold tens of thousands worth of gift cards in a few weeks," says Drew Watson of Hops & Pie, an artisan pizza and craft beer bar in Denver. They incentivized deals with a discount: anyone who purchased a $100 gift card would get a second one for $25 thrown in free. "People would buy gift cards and give them away," says Watson, who credits the friendly neighborhood community with doing everything possible (even signing stimulus checks over to employees as tips) to help out a favorite local spot.
A PSYCHOLOGICAL LIFT
During 2020, gift card sales brought in $275,000 for McDonnell. The figure was $25,000 lower than 2019 gift card sales; overall, 2020 sales were down 50 percent from the prior year. Along with sorely needed revenue during a down year, 2020 gift card sales provided an important psychological lift for the independent operator: "I thought about [throwing in the towel]," says McDonnell. "Then I thought 'all these people who bought gift cards are going to be so pissed off.' That's one of the things that kept me going."
While Watson is certainly grateful for customer support, he's less interested in gift cards as another revenue stream. He doesn't put effort into marketing, selling or otherwise promoting the gift card program and he scoffs at the idea of online sales. Instead, he's spun the gift card concept into membership or club programs patrons can buy into, build- ing community and generating additional revenue through a 10th-anniversary "beer for a year" program and an annual beer club membership.
For just $100, patrons can buy a card that entitled them to one beer a day for a year. Watson estimates they sold 50 cards over the course of a one-week promotion. He estimates that 90 percent of the time, people order additional items when they stop in for the daily beer.
A separate beer club membership costs $60 a year. That's been on offer since the restaurant's opening, and Watson estimates he's sold thousands of memberships in that time. Beer club membership entitles patrons to a range of perks: discounts on draft beer, early access to the bar on Sundays, $1 off pizza slices, and more. As a special promotion during COVID, Hope & Pie offered $100 "lifetime" beer club memberships.
These membership cards aren't gift cards, but they fulfill the same objectives as gift cards while offering customers something unique to the concept. Both types of cards build loyalty. Both encourage repeat business, getting people to visit regularly and spending more money when they do come in. The traditional gift card may work fine for your concept, but if it doesn't, or if you want more ways to expand revenue, look for an offering that drives revenue to your concept while giving your customers something they find valuable, such as discounted beer, for Hops & Pie.
Beer is central to Hope & Pie's concept as a beer and pizza restaurant, but Watson says it only makes sense to use alcohol as a loss leader because the concept's food is strong, too. "I'm comfortable with that because I know you're going to eat," he explains. If your food isn't strong and you're discounting alcohol, people are more likely to grab a cheap drink and go somewhere else to eat.
GIFT CARD ACCOUNTING AND LEGAL ISSUES
Software makes it fairly easy to track gift card sales and redemption, but there is extra accounting and invoicing work to plan for. Technically, explains Jim Pendergast, senior vice-president at altLINE, which is a division of The Southern Bank Company, gift card sales should be "[categorized] as 'deferred revenue liability' on your [balance] sheet until the gift card is used, in which case it's equitable to a cash exchange." Since few gift cards are redeemed immediately, there is a time lag with gift card accounting. While McDonnell views this as "an interest-bearing loan to me," there are cash-flow considerations as mentioned above. So, you're not caught off guard by cash flow problems if a high percentage of customers redeem in a short time frame, Pendergast recommends tracking and managing revenue liability deferrals over time.
On the legal side, you should be aware of "The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) includes a national prohibition on gift card expiration earlier than five years after the purchase date. The statute also prohibits certain types of dormancy fees, unless the gift card has not been used for at least one year, and also so long as the fees are not charged more than once a month," says David Reischer, attorney & CEO of LegalAdvice.com. There's an exception when gift cards are donated to charities; since no money is exchanged, these can have an expiration date.
In addition to federal regulations like the Credit CARD Act, there may be state and local laws to know, such as abandoned property laws. In certain states, unspent gift card balances over a threshold must be turned over to the state under escheat provisions that address abandoned property.
Peter Horne, Content Lead at Geoff McDonald and Associates, warns against an unpleasant yet not uncommon scenario: customer response if your restaurant goes out of business. "While you should essentially pay them back for their gift cards straight away, bankruptcy is complicated so the process might not be that simple," Horne notes. Upset consumers could take you to court under the Consumer Protection Act, seeking a refund for unused gift cards -- and if awarded judgment, you'd need to pay their legal fees on top of the refund.
Discounting bears tracking as well, both for accounting purposes and its impact on cash flow: when you sell a $100 gift card for $70, it's the discounted value and not the full balance of the gift card that's taken in as revenue. POS systems have a discounting feature that allows you to load a gift card with the discount baked in, reducing accounting reconciliation.
What about breakage? The SEC recommends accounting for breakage revenue proportionally to redemption. If your historical data shows that 10 percent of your concept's gift cards go unredeemed, you'd then take five percent of the breakage as income once 45 percent of sold gift cards are redeemed and take the remaining five percent of breakage as income when the remainder of sold gift cards are redeemed, for example.
A BIG WINNER
Blackhawk's "2020 BrandedPay™ Holiday Shopping Preview" report revealed gift cards as the big winner of the 2020 holiday shopping season, with a majority of consumers reporting they planned to purchase double the amount of gift cards as in previous years.
LEARN MORE: https://merchants.fiserv.com/en-us/products/merchants/gift-and-payroll-card-solutions/?placement=solutions
GIFT CARD STATS
Fiserv, global provider of financial services technology, reports that fast-casual diners spend more than the gift card amount 80 percent of the time.
RESTAURANT POS
Restaurant point-of-sale and management system company Toast estimates that its customers' guests spend an average of $25.34 over the gift card amount when they redeem a card.
LEARN MORE: https://pos.toasttab.com/blog/on-the-line/restaurant-gift-cards
