Posted by Chuck on October 13, 2019
Gift Card Deals

Published on October 13th, 2019 | by Chuck

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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.



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Jonathan S
Jonathan S

Thanks for sharing this! I’ve always wondered myself what sort of agreements made this profitable for everyone involved.

I wonder what percent of the 9% breakage are from gift cards that never get used (i.e., lost/forgotten) vs. the small balances remaining that are difficult to liquidate?

MrObvious
MrObvious

Very interesting read.
The typical VGCs sold in stores have an added 1-4% fee on top that helps cover the costs. Since those cards are usually purchased in higher denominations than standard store gift cards, the actual dollars will be higher (it takes 20 $25 store cards sold to equal one $500 VGC), so selling at lower marginal costs might make sense.
Obviously the Simon $1000 VGCs have a very different margin.

Eric
Eric

VGC activation fee isn’t limited to 4%.

Just last week a lady in front of me purchased 20x $25 VGC at a grocery store and paid $79 in activation fees. $3.95 fee on $25 card is ~16%.

Miles
Miles

Keep in mind, for VGCs, they can collect a swipe fee when it’s used.

Trevor
Trevor

But not from us when we use PIN 😉

ocheriedear
ocheriedear

Please explain! 🙂

Dayn_Perrys_Vape
Dayn_Perrys_Vape

PIN debit transactions still have interchange fees, just much lower than credit cards.

Miles
Miles

So the thing here is that prepaid debit cards can actually charge a much higher interchange fee than normal debit cards. That’s probably why certain merchants don’t like them.

dcatast
dcatast

~0.8% interchange on meta

barrytuneup
barrytuneup

ok I understand the breakage part (they profit from unused $ left on cards ) but how do you explain the deals the groceries run on VGC and MCGC that include gas points/free 15.00 off food vouchers..etc .Who is making or losing $ on these offers?

MrObvious
MrObvious

Probably loss leader… just to get you in the store and entice you to spend more of your wallet spend with them (vs competitors).

Eric
Eric

This is definitely it. There’s no way they make money on those deals. That’s why S&S limits those type of deals to 10 per household.

Eric
Eric

I guess the store collects the activation fees.

So $15 discount on 2 x$100 (safeway deal) is only $5 loss but it brings customers who can buy gift cards. Not a terrible deal for the store.

Especially if $195 sale adds to their quarterly sales goals?

David
David

Also on Gift cards, it’s difficult to use every penny. Go over by one penny and the card will be denied. Restaurants and gas stations use a prior authorization that is larger than the purchase amount so some funds may not be available for a week. If you have enough of a balance for the purchase but not the prior authorization, card will be denied. Cards are not valid outside of the US.

All these restrictions increase the breakage and profits of the VGC provider.

J T
J T

If you’re not liquidating them in the usual MO manner, and you end up with small balances, then part of your exit strategy should include a retailer that auto-drains VGC, especially if it’s one you would use anyway. Lowe’s is a good example: I’ve personally used 9 (or 10) VGC each with pennies remaining, on the same transaction, swipe – select credit – confirm partial payment (remaining card balance) – new (slightly lower) payment due – repeat.

SkinnyElvis
SkinnyElvis

I always load to an amazon gift card the last bit of a balance

Celia
Celia

There are a few retailers that auto drain the last of a gift card. You can also put the exact amount left at amazon.com.

Amy
Amy

I use them at Walmart and Meijer and have no problems getting the full amounts charged. If the purchase amount exceeds what’s on a card, it simply deducts the card amount from the total and expects me to pay the remainder (which I then do with one or more additional GCs). At most I’ve used three or four this way on a single purchase.

calwatch
calwatch

Same with Costco, which autodrains Visa cards and is my usual go to for these activities.

Eric
Eric

I pay my electricity bill with those $4.32 balances left on VGC. Amazon/costco, or autodrain at a grocery store would work as well.

ocheriedear
ocheriedear

Not sure how the accounting works for all of this, but I thought that the law is that the stores do not get to keep the breakage.

Electroman

The issuer keeps it, not the store.

Bill
Bill

Had a retailer give me grief last week when one of the “Happy” cards wouldn’t swipe. The point of sale will allow the number to be manually keyed, but only with a manager’s override/authorization. Then, at the end of the transaction, the cashier tossed the card towards the floor. She sifted through the trash can , told me that she looked and she didn’t have it, and said that I must have the card. I didn’t have the card, but didn’t feel like a scene, so ended up walking away. I don’t expect a problem with the purchase…

missjenniferd1🦉 🦁

i would have waited patiently for them to find the card. pretty sure that cashier stole your money by finding the card later. hopefully there wasnt much left on the card.

cjb
cjb

Nobody ever “feels like a scene”, but you absolutely should have stood up for yourself and not allowed that cashier to pull that nonsense. At the very least, you should have told a manager what happened and waited until somebody “found” your card. Don’t allow people to treat you that way.

Debit
Debit

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

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.)

Kyle ❤️
Kyle ❤️

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

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 ❤️

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

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

Wtf does any of that mean?

Burton

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%.

Guy who buys stuff
Guy who buys stuff

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

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

Eric
Eric

I was thinking the same thing.

calwatch
calwatch

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

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

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.

Eric
Eric

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

Yes

Joe
Joe

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.

Peter
Peter

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

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

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

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.

parkdanil

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.

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