This is just one of the stories from our “I’ve Always Wondered” series, where we tackle all of your questions about the world of business, no matter how big or small. Ever wondered if recycling is worth it? Or how store brands stack up against name brands? Check out more from the series here.
Marketplace listener Mark McCullough from Miami sent in this question:
“Why do stores sell gift cards for other stores at grocery stores and gas stations? What profit do the stores make selling the gift card for another store, and why does that store allow a gift card to be sold at another location? What do they get out of the deal?”
The simple answer is: All sides get something out of deal. The store selling the gift cards gets added foot traffic, and the brands with gift cards that are being sold get more shelf space. Plus, there are third-party brokers who handle the gift card business and negotiate cuts of the sales for everyone. That wall of different gift cards hanging on hooks at the end of a drugstore or grocery story aisle actually has a name: the gift card mall.
At a Target in downtown Los Angeles, John Jenkins and his daughter stood in front of one such display, talking about which option her friend might want for a gift. The Jenkins’ had dozens to choose from — gift cards for iTunes, Starbucks, Netflix, Harley Davidson, Facebook, plus other retailers and restaurants.
Jenkins said he’s happy the store-within-a-store is there.
“Convenience is definitely it,” he said. “You can do some shopping and get a gift card all at the same time.”
But it wasn’t always like this. Remember when, in order to get a gift certificate, you had to go to that particular store and some poor clerk would fill it out by hand?
Shelley Hunter, a former product analyst who now writes for giftcards.com as the Gift Card Girlfriend, said the shift to plastic actually started with Blockbuster Video.
“They were having all sorts of problems with people making counterfeit gift certificates,” she said. “They were the first company that converted to a plastic gift card that ran through the cash register. It was basically a fraud-prevention measure.”
It worked. All the big brands adopted it.
So, how did their different cards end up in a gift card mall like the one John Jenkins was so fond of at Target?
A third-party broker. Two major companies, Blackhawk Networks and InComm, manage and distribute many of these gift card malls in the US. Teri Llach, chief marketing officer at Blackhawk, said the business took off about 15 years ago and now their business takes care of the whole process.
“We get the cards, produce the cards, process the cards, develop racks that were easy to shop, merchandize those racks,” she said. “We basically come at it with, ‘Grocery store, don’t worry, we’ll take care of everything, and we’ll get this category up and running for you so it’s really a nice value added for your customer.’”
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Brands pay Blackhawk to get in the gift card mall and Blackhawk passes some of that money onto the stores that host the mall.
“Whomever’s card it is, they’ve decided that the extra distribution in the grocery stores is worth them giving up a little bit of their margin on that card,” she said.
Blackhawk also acts as the go-between for the brands and the retailers on what to include or not. In Target, you won’t find an Amazon or Wal-Mart gift card.
But according to Ben Jackson, who follows gift card developments for Mercator Advisory Group, Blackhawk Network didn’t begin as a gift card processor.
“It actually started with phone cards, long distance cards and international calling cards,” he said. “That’s where these companies began.” He said prepaid calling cards gave Blackhawk expertise in processing transactions. “And then they slowly expanded into gift cards,” he said.
Now gift cards are a $100 billion industry.
At a CVS in Los Angeles, customer Marcelina Chavira said she reluctantly picks up a gift card on occasion.
“If you’re in a hurry and you forgot it was someone’s birthday, you can pick up your toilet paper, and pick up your Gatorade, and pick up your gift card for whomever likes whatever specific gift card they have on the stand,” she said.
It’s convenient for the customer. It makes money for all involved, with just the slightest bit of aisle space.
Is it the most ideal, personal gift? Probably not.