The Economics of Retailer Gift Card Sales

There’s an interesting post from TNSepta on Reddit (& humbled_thoughts on FT) breaking down the economics of BH gift card sales. Here’s BH’s Form 10-K filing with the SEC. I’m having trouble breaking down the data myself, but TNSepta breaks it down that BH is essentially earning 9% on the breakage of the gift cards (that is, the amount of gift cards that go unused). The cards they sell themselves online give them the full 9% profit, minus swipe fees and overhead. The cards they sell through physical stores (Kroger, Shoprite, etc., etc.) they pay around 5% to the store and keep 4% themselves.

Since the retailer who sells the card gets about 5% on each sale, that more-than-covers the 2-3% swipe fee; in the case of cash purchases, they net the full 5%. Gift cards also take up little space, and are an easy addition to any store.

It seems that on VGC’s, some stores who sell the cards are getting similar commissions, given how enthusiastic they are in selling $1k cards. As TNSepta notes, this isn’t likely to go on forever as BH will see their breakage is little-to-none on these cards and will lower commissions accordingly.

I’ve long wondered how much stores make on gift cards. These numbers seem to make sense from all ends as stores are willing to swallow the 9% in order to have the customer locked into their store and fronting the money, plus, the credit card swipe fee is already accounted for; the middleman gets their 4% which covers their overhead and lets them run at a profit; the retailer selling the cards gets their 5% which covers their swipe fees and leaves a couple % profit.

The VGC part is the part that’s still a bit puzzling as no one is locked in anywhere, and it’s only the breakage that really leaves room for anyone to profit. And, presumably, breakage on VGC’s is much less given how easy they are to use.

Subscribe
Notify of
guest

52 Comments
newest
oldest most voted

Barry
Barry (@guest_1000929)
June 19, 2020 19:39

I’ve learned more about why there’s so much breakage on VGCs. I’ve had 3 VGCs that I’ve used to make purchases and later received refunds on them after they were drained. All 3 of my gift cards were locked after the refund. If you call the phone number on the back of the card after it’s locked, the system won’t let you speak to a customer service rep if you enter the numbers on the front of the locked card. I found that I had to enter the numbers on a touch tone phone from a good working card to get to the menu where I can then talk to a customer service representative. To unlock the card, you need to email a receipt with the original charge and then a second receipt showing the refund.
The customer service rep will tell you that the card was locked to prevent fraud, but I’m sure that the card was locked so that Gift Card Mall can easily identify these cards and swipe the money from them if they go unused. They’re probably counting on you to throw the card away after you drain it.
Basically, if you ever think you’re going to get a refund on a VGC, you need to keep the card, keep the purchase receipt, and keep the refund receipt. This seems like a higher hurdle than it should be for the ability to spend your own money.

Celia
Celia (@guest_1001028)
June 19, 2020 23:31

That’s why I never use VGCs on anything I would return. Only once have I had to receive a refund and it took like. a week. But the card was not locked up.

SilentMotion
SilentMotion (@guest_824965)
October 14, 2019 13:02

Very good read. The breakage is much higher than I thought it would be.

parkdanil
parkdanil (@guest_824807)
October 14, 2019 09:16

oh boy, now I want to start selling GC’s. I had no idea there was any profit in it, figured it was just a way to get customers into the store.

Peter
Peter (@guest_824712)
October 14, 2019 00:19

Fascinated that the business model relies so heavily on the breakage, e.g. gambling on customers’ behavior. Yes I understand the law of large numbers and the 9% is likely very stable over time… but still, the frugal side of me just can’t understand how nearly 1 in 10 gift card recipients waste money in our benefit.

Charles
Charles (@guest_824834)
October 14, 2019 09:58

Not Visa or Mastercard specific, but my wife and I probably have $1000 in GC just sitting in a drawer. Various birthdays, work giveaways, and just straight up free gift cards go unused. I probably have $200 in AMC gift cards, but we don’t go to the movies more than once a year. Even if we do, I get 4 tickets every year for my birthday from work. We should probably convert them to cash either by selling online or at one of the gift card machines, but “what if” keeps us from doing it.

aubergine
aubergine (@guest_824928)
October 14, 2019 12:12

if you get a $20 Build a Bear GC, its going to cost you $40 to use it, so you just pass it on or never use it. My kids get junk like that all the time. I’m convinced its the same shitty cards getting passed around by struggling (or cheap) parents….

Peter
Peter (@guest_825171)
October 14, 2019 18:43

Yeah… but I feel like what both of you mentioned are matter of float, as opposed to breakage. Maybe that useless build-a-bear gc will eventually get tossed out with the old toys, but the rest sit in a box somewhere until it gets used… right? I have some pretty old gcs laying around as well but I don’t intend on letting them go to waste.

Joe
Joe (@guest_824699)
October 13, 2019 23:59

This has literally cost me sleep- how the hell are they letting us do this? It makes me angry they dont have better analysts.. and makes me wonder where my company is hemorrhaging money.

I just had an idea about SM today though. I wonder if they negotiate breaks in the CC processing fees based on volume. I wonder if the recent promo is an effort to push them over a certain threshold to get a bonus.. .1% on $1B is not insignificant.

Eric
Eric (@guest_824649)
October 13, 2019 21:45

Am I the only one that had no idea what “BH” was supposed to stand for before I clicked on the SEC link?

Joey
Joey (@guest_824673)
October 13, 2019 23:02

Yes

Guy who buys stuff
Guy who buys stuff (@guest_824638)
October 13, 2019 21:26

VGC profits may also be tied to float.

Also, breakage is probably quite common on VGCs as well… I find them on the ground at local gas station all the time (at least 2x times/month) that I pick up off the ground like finding loose change. They often have as much as $5 left on them. When I found the first one, I thought someone had just lost it… but after the 2nd and 3rd and more, I’m sure that many are just being dropped on accident. My guess is that they are issued by employer (or perhaps drug lord), person swipes it and gets $100 hold at pump, sticks $96.50 fuel in tank, then tosses it because they remember that time they tried to use a small value card at pump and know it didn’t work. Station I find them at is on I-10 not far from I-35 intersection, which is a straight shot to MX). Now, when I find one, I dont even check balance… just swipe at grocery store and mystery balance buys some of my groceries.

SamL
SamL (@guest_824648)
October 13, 2019 21:43

I’m stunned at this: “sticks $96.50 fuel in tank”. That’s either a gigantic tank, or reeeeally expensive fuel.

Eric
Eric (@guest_824651)
October 13, 2019 21:49

I was thinking the same thing.

calwatch
calwatch (@guest_824655)
October 13, 2019 22:01

Especially in Texas. Now in California, where gas is routinely $4.30+ a gallon, $96 is just the tank for a full size SUV.

sdsearch
sdsearch (@guest_824863)
October 14, 2019 10:52

Or the example was simplified? Maybe they used it twice for amounts just under $50, which added up to just under $100? But now that they see how low the remaining balance is, they abandon it?

In other words, they know they just have a few dollars left, it doesn’t matter how they got to that point, if they only want to (or think they can) use it at gas stations, they abandon it at that point.

Burton
Burton (@guest_825519)
October 15, 2019 14:07

Sometimes the pending charges will trick people into thinking they are empty as well as they can be pending for over a week, even placeholder transactions (restaurants for tips, some gas stations). If one wasn’t paying attention, they could easily think they used up the card and toss it/lose it before the remaining few dollars free up again.

Debit
Debit (@guest_824505)
October 13, 2019 17:36

Also does Simon mall not allow mobile payment at your location? If they take down my information because i bought too many gift cards then they should allow us to use mobile payments. I won’t be cheating after giving them my information.

Bureaucratic idiots!

Frank
Frank (@guest_824630)
October 13, 2019 21:13

Wtf does any of that mean?

Burton
Burton (@guest_825516)
October 15, 2019 14:01

Exactly. I assume he means he wants to earn at least 2% with his Apple or BOA cash rewards card (or similar card) but physically swiping only gives him 1%.

Kyle ❤️
Kyle ❤️ (@guest_824486)
October 13, 2019 16:30

I still have not joined the ranks of MS and gift card games. I always appreciate posts like this though and love learning about it all none the less. Thanks!

Celia
Celia (@guest_824517)
October 13, 2019 17:56

I never got a chance with MS and money orders, Walmarts by me shut it down before I got started. I can only play the little game, buying cards at discounts and using for organic spend and cc/bank bonuses. It adds up I guess. Only have to put in part time hours work wise so anything I gain is gravy. I’ve learned so much from this blog.

Kyle ❤️
Kyle ❤️ (@guest_824770)
October 14, 2019 06:38

I live so far from anywhere that really carries cards. I see the discounted cards get posted (especially office depot or max) on here but they are usually one day deals and I only go to town once every week or two. I think I would participate or pay attention more if I were closer to town and it was something I could do on my way to work or on the way home type deal.

Debit
Debit (@guest_824478)
October 13, 2019 16:10

I am always worried about breakage myself. Did i throw out a VGc that had money on it. I have done that for one card with 0.01 on it. The amount doesnt matter the fact i didn’t catch before throwing it out was concerning. Now with all these various promotions running at the same time its easy to mix up the $200, $500, $1000 cards.

Yeah i keep them separate but when you have increase the moving parts the chance of something breaking is higher.

Amy
Amy (@guest_824567)
October 13, 2019 19:14

I write balances on the backs of GCs and keep them for a bit if I suspect there might be returns that’ll put money back on them. Then I go to the appropriate online sites to check their balances and make sure they’re zeroed out before tossing them. (Though, to be honest, I still haven’t quite done that as I store away old cards in a box, hoping for a recycling option in the future.)