Gift cards give retailers a boost
Retailers make money by selling gift cards to be redeemed at other stores.
Jeff Horwich: Walmart.com recently featured a deal that seems too good to be true: For $80, you could buy a $100 gift card for Apple's iTunes. It lasted until a tech blog noted the deal -- then it quickly went out of stock. But just what was going on here? It's a further indication that the value in gift cards goes beyond the number stamped on the front.
Here's Marketplace's Jeff Tyler.
Jeff Tyler: When consumers buy a pre-paid gift card, the merchant also gets a present. Ben Jackson is an analyst with the Mercator Advisory Group.
Ben Jackson: It’s a way for them to lock in future sales. And we know too that gift cards are often a license to spend. So somebody comes in with a $50 gift card, and they’ll end up spending $75 or $100 with that store.
OK, but why do grocery and drug stores sell gift cards that can only be redeemed at other retailers? Brian Riley is senior research director with CEB Tower Group.
Brian Riley: So the retailer, say, on the hundred-dollar gift card might be charging its distributors 92 cents on the dollar. And so you have that 8 percent margin, which would get translated into commissions along the way.
Some businesses will eat that commission in order to provide customers with discounted gift cards. That’s how Wal-Mart can sometimes charge $80 for a gift card worth $100 at iTunes. The difference is considered the cost of attracting new customers.
I’m Jeff Tyler for Marketplace.