Published on October 13th, 2019 | by Chuck48
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.