I would also keep in mind that anyone with a computer (or phone) and an Internet connection can get an Amazon gift card in a matter of seconds without even getting off their chair. Also, Targets and Walmarts are everywhere. I have three Target’s within a 10 minute drive of where I’m sitting but only one Olive Garden. The Target’s you can see from a half a mile a way, the Olive Garden, like many restaurants, you almost don’t know it’s there until you’re practically in front of it.
IOW, Olive Garden putting gift cards in other stores is advertising for them. Target and Amazon don’t really need to do that kind of advertising.
But I’m almost positive the Target sells Amazon gift cards.
One other thing, Target and Walmart are major competitors, they’d have to give each other pretty steep discounts to sell each others cards.
By selling Target a gift card in October (and collecting the funds on October 1st), Olive Garden now has an additional $20 in cash for which it will have to exchange $25 in food (menu price, not cost!) in the future.
In this case, the future can be timed - you can assume that most cards will be given out by December 25th, and most will be redeemed after December 25th.
So now Olive Garden now has to turn that $20 into $25 of value in order to, at least, break even. So here’s how they do that:
Invest the $20 into operations/finance/debt payoff/stock buybacks/whatever. This should be enough, with the rest of the list just gravy.
This isn’t accurate. Olive Garden receives the sale immediately (if they sold the card), but the revenue is deferred until the card is used. That’s why cards have expiration dates. If cards are left to expire, the revenue is recognized on the expiration date.
The Federal government allows gift cards to expire 5 years after purchase. This is a liability that can be calculated, maintained, and eventually converted into an asset.
As a customer I like gift cards that don’t expire but as someone who does some light accounting work I can understand it. With gift cards that don’t expire you have an ever increasing liability account with nothing you can do about it. I’m curious if big business have some mechanism for getting cards that have been inactive for a long time off their financials.
I swear I didn’t see that post while I was writing my last post. Even so, some gift cards (like the ones I use at my store) just don’t expire and IIRC the state of California doesn’t allow gift cards to expire.
Why would you want to get them off your financials? Old, unused gift cards that won’t expire but which will hardly ever be redeemed are the best sort of liability you can get as a company. It doesn’t carry interest, and it will never fall due. It’s almost like equity, but better in two respects: You don’t have to pay dividend on them, unlike equity; and it doesn’t diminish your return on equity, since on your balance sheet it shows up as a liability. So there’s no reason to get it off your financials; you can just keep it there indefinitely, it’s the best thing you can have.
And the cost of the gift card in real dollars decreases as time passes. Redeem the card now and for $25 you can get a meal, appetizer, and soda. Redeem it 5 years from now and it gets you a meal and an appetizer. In 10 years, a meal and a soda.
One other thing that I don’t think has been mentioned: maybe the giftee has never been to Olive Garden and the card gets them in the door. They may discover that they love to eat there and OG has gained a new future customer.
Also, they aren’t really taking a loss. They obviously ordinarily make a profit when you spend $25 there. They are now just making less of a profit or at the very worst breaking even. For reasons that others have stated well, other factors mean that on the whole, they make a lot of money on the transaction.
Nope, gift cards are escheatable - States Bite Into Broken Gift Cards. Wow, I got to use the same answer and same link in two different threads over two days time.
Interesting link. It appears, though, as if the escheat of gift cards is more in the interest of the treasury than that of the company - since escheated cards are taxable income. If they staid on the balance sheet forever, the practical outcome for the company would be the same, but the amount of the forgotten cards would not be taxed.
I know it was just tossed out as an example ($25 card sold for $20, a 20% discount) but FTR I used to work in a convenience store that sold a variety of gift cards. The BEST commission was 12%, but most ran in the 5-7% range.
Like many other things, it was about volume and getting them in the store to buy other things. We didn’t make a lot of money on gift cards, but they took up very little space, didn’t spoil, and required next to no labor to sell. So even that tiny 5% commission was almost all profit.
So, Olive Garden likes to have others sell their cards because more people overall will buy them, even if they don’t all pay full price, total revenues are higher.
And the retailer sells them because they can make money, although not a lot.
Another point is that if you bring a $25 gift certificate to Olive Garden, you usually will spend more than the $25. People tend to max out their cards in one visit, and to do that they spend more than what is on the card. So you’re likely to buy $35 of food (including high-profit items like drinks and dessert) with your $25 gift certificate.
Not all the time, of course, but enough for it to be a further profit for the issuer.
One obvious way a store could take advantage of the situation could be this:
Conglom-O buys $5000 worth of Acme gift cards for $4000 (@ $20 per $25 card)
Conglom-O uses the gift cards to buy $5000 worth of Acme products at a 20% discount.
Conglom-O sells the Acme products for 10% below Acme retail prices.
Profit!!
If this actually worked, you would expect to see companies doing this. Why won’t this work? Do third party gift card sellers normally have to sign contracts agreeing not to do this, or are there practical reasons I’m not thinking of?
Some grocery stores that have gas stations give up to 12% in free gas on gift cards. I can’t imagine they have the margins to justify that, but I assume that most customers do not realize the full value of the “free gas.” I always do, though. They do the same thing with groceries, though the groceries are typically the most expensive in my area.
Example: Gas is $3.00/gal. Store gives 20 cents off per gallon up to 30 gallons per $50 in gift cards. I buy $750 in gift cards. Then I pump 30 gallons of gas for $0, a savings of $90 (12%). I always get 30 gallons of gas for $0 when my fuel points reach that point.
I imagine a more typical customer might do something like accumulate $200 in gift cards and cash in their 80 cents off, and only buy 12-15 gallons. In this case it’s closer to a 5% discount.
I rarely end up spending more when using a gift card. I always end up spending say $47.85 using a $50 gift card from Barnes and noble or something. The additional $2.15 rarely gets used. Multiply me times thousands and its a tidy profit.
Also they are earning interest until the card is actually used. Probably adds up to millions in essentially interest free loans for the issuer. Genius concept for the retailer.
That’s a nice idea, but it means you end up having to spend $750 in groceries at that store. It only makes sense if you would normally (without this scheme) spend that sort of amount at that very place, too. If you wouldn’t, and the only reason you shop there is because you ran up piles of gift cards for your gas, then there’s a chance you’re effectively cross-subsidising your free gas through your groceries, and you’re saving much less if anything.
I assumed the gift cards were put in the store for free - a product they can carry that they don’t have to pay for. When a customer buys one and activates it, the full value goes to Olive Garden or whoever issued the gift card. The store doesn’t make money, but it doesn’t lose money (it may even make interest on the money by keeping it for a week or whatever). And it gets an extra product to sell on its shelves to bring in customers. All else equal woudln’t you rather shop at the store that carries a good selection of gift certificates than one that doesn’t have any gift certificates?
No way the issuer is losing 20% on every gift certificate, that’s not going to happen.
as I mentioned above, the discount is no where near 20%
buying products from their regular supplier/wholesaler would
still be cheaper and easier (delivered right to them as opposed to having someone go pick up the products from a retail store)
I am reasonably sure that no retailer sells gift cards to other retailers without taking a commission
your absolutely right that there are other advantages to selling them, such as being able to hold onto the money for a few days before turning it over. Helps the cash flow situation.
I used to work for a convenience store chain. The ice cream we sold was the brand of another chain. One of my employees asked why we were selling our competitors products (as in, why help them out). Several reasons:
we didn’t manufacture our own ice cream, so it was sell someone else’s or don’t sell it.
even if we did, their brand was well known and preferred by customers
we made money on every 1/2 gallon sold because we bought it at wholesale.
why did they allow us to sell their product? Because it puts their product in more hands (we had 4 times as many locations as them). It’s a win-win.
