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A lot of business activity currently around Gift Cards sector

By Jason Wolfe | Published October 3, 2012 | Google+

Seems just a year or two ago the big ‘new thing’ was Groupon, and Living Social. Although online couponing started, ironically in 1996 (CouponsDirect.com which I started), it wasn’t until 14 years later that the online coupon/deal had its day. Even sites like Google had ‘Google Offers’ and Yelp started their offers section too. The frenzy was palpable. When I was asked if the model would work – I immediately said no. Why? Because the poor Pizza Shop owner offers a Groupon for $50 and earns $15, winds up with 1,000+ new customers, paying below the actual cost to make the pizza, quality of the Pizza goes down, he has to hire more workers, and then no one returns. Not to mention my thoughts on if it was legal to sell coupons. So, fast forward a year or two – and look below at Groupon share price. As of today it is trading at $2.56 down from $19 earlier this year.

So now, it seems, everyone is on to Gift Cards.

This week Yelp announced they are offering the ability for their Yelp merchants to offer ‘gift certificates’. It appears these are user generated paper printed certificates.

GiftRocket launched last year, Giftly, Gyft, and a host of others too numerous to list.

Layer onto those websites the flood of Secondary gift card sites (where you buy/sell unwanted gift cards), with sites like Plastic Jungle, Cardpool, Gift Card Rescue and a host of other names too numerous to list. All trying to capture the next BIG thing…online gift cards/codes or the perceived next big thing.

Innovation & competition in the gift space is heating up. Cardpool recently filed a patent infringement lawsuit against PlasticJungle , and we just signed a deal with Blackhawk Networks this week for 3 patents we were issued in April.

The Gift Card industry has been a roughly $100 billion (value load) business per year. 99% of that business is done with essentially 3 companies – Blackhawk Networks, InComm, and American Express. And of those 3, 99% of the volume has been plastic based sold from drug stores or grocery stores.

There seems to be this thinking that if someone can develop the digital Holy Grail for gift cards, they can capture a large part of that $100 billion.

But here is reality:

First the value load at $100 billion may be accurate, but the actual revenues off those value loads are probably more like $10billion. So the market is more like $10b in revenue and the size is not what is perceived. Secondly, 99% of this volume is USA based. Literally no one has a global solution to the ‘gfit card’. There is opportunity there, but until now no one has figured it out.

Secondly, the gift card market at $10b is mostly that large because they are given and purchased with incentives behind them. For example, locally Giant Eagle sells gift cards in the grocery store here (provided by Blackhawk), and for every $50 spent on gift cards they give $.20 off per gallon of gas. So people may be buying a lot of gift cards for everyday purchases in order to save money on gas– not to give as gifts. Additionally AMEX provides gift cards when redeeming their points for their loyalty program, again an inflated reflection of the actual gift card industry. I don’t know the exact percentage of Gift Card sales that are generated by people actually wanting to Buy a gift card – but I’d bet its more in the $2b range.

Lastly, infrastructure and client level integration at the POS is a big project. Even if the new companies launch and start to grow – they will quickly see that they need to integrate with merchants (a lot of times through a third company like First Data). And with this integration comes delay, red tape, vying interests and more. So the reality of implementation is very low.

Despite all the great new ideas, the reality is that the gift card market is not as big as we all think, implementation is a pain, and customer are being trained to buy them with incentives attached. I think it’s wise to remember these facts, focus on a product that takes no/little integration with merchants, and incentivize your customers to buy from you (over the grocery store). Who will do this, remains to be seen – but I can tell you that the battles are starting and the industry is heating up. I think in the next 5 years there will be a MAJOR industry changing technology and service that will change the landscape entirely. We like to say, Variety, Speed, Customization and No Fees (incent) are the key elements. At any rate, I look forward to the ride!

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