Gift Cards Skew Retailers’ Post-Holiday Pricing Strategies

The holidays are over, but retailers are still waiting for the holiday shopping season to end.

Increasingly, consumers are opting to give gift cards instead of actually buying an article of clothing or an electronic gadget. This is good news for retailers hoping to drive up modest margins. When redeeming a card at the store, the gift recipient usually winds up spending more than its face value, according to a recent survey by Accenture.

At the same time, though, the growing popularity of gift cards introduces uncertainty into retailers’ pricing, merchandising and customer service operations.

Bumping Into Valentine’s Day

“Basically, gift cards extend the holiday buying season well past the first week of January, when it traditionally would end, until the beginning of February,” David Hogan, CIO of the National Retail Federation, a Washington, D.C., industry group, told CRM Buyer.

The buying season actually may stretch out even longer than that, suggests a recent survey by American Express, which found that more than one in four respondents who planned to purchase a gift card for the 2005 holiday season would, if they received a gift card for the holidays, redeem it within six months; 11 percent said they would use it within the year.

Four in ten respondents expected to redeem a gift card within a month; only eight percent said they would do so within the post-holiday week.

Changing Pricing Strategies

This rapidly growing consumer buying pattern is making it more difficult for retailers to plan their post-holiday sales and pricing strategies, Judy Bayer, director of Advanced Business Analytics for Teradata Europe, Mid-East and Africa, told CRM Buyer.

“After Christmas, people are headed to the stores not only to redeem their gift cards but also to take advantage of the sales,” she said. “If a retailer can figure out how and when its gift cards will be used, [it] can better plan for this second wave of buyers.”

For instance, retailers might be able to eke out additional margins on certain items if they take expected gift card redemption into consideration. “They could factor in cross-sell affinities of certain items, for instance, and plan promotions,” Bayer said. On the other hand, a store that expects large numbers of post-holiday shoppers might choose not to mark down certain items.

Inventory Implications

The trend for gift cards is certainly not new, although their use increases every year. They are still novel enough for retailers to hesitate over post-holiday pricing strategies, though. “Gift cards are still a very big issue for retailers,” Bayer said. Once enough data has been accumulated, the theory goes, retailers will be able to implement more accurate pricing, promotion and markdown strategies.

Fortunately, retailers have a better grip on gift cards’ implications for inventory management, Hogan said. “Retailers have excellent sales history records — as far as what customers shopping patterns are during the holidays and post-holiday season.”

Supply chain technology and software systems are also flexible and adept enough to factor in changes in consumer buying patterns, he said.