A Sharp Wake-Up Call for Incentive Planners
March 13, 2008
Gift card holders were left holding the "short end of the plastic" when The Sharper Image filed for Chapter 11 bankruptcy. With more retailers predicted to go out of business in 2008, and similar voided gift card situations to follow, what's in store for the incentive industry?
By Alex Palmer
When Sharper Image Corp filed for Chapter 11 bankruptcy at the end of February, the specialty retailer left gift card owners worried that their $25, $50 or hundreds of dollars tied up in the plastic cards had become worthless. Although cardholders are now able to breathe a sigh of relief after the card suspension announcement—the company began accepting gift cards again—there's a catch: To get the full value of their cards, customers are required to use them in full and they must purchase items costing double the card’s value.
Though having to spend $50 to use a $50 gift card is likely to irritate plenty of cardholders, these customers are fortunate to have the opportunity to redeem anything given the current economic circumstances. And Sharper Image cardholders will surely not be the last to be left holding the "short end of the plastic," as more retailers are expected to go out of business this year.
Since gift cards are treated by the company as a loan, rather than as cash, cardholders are considered to be among the company's "unsecured creditors." While secured creditors, like landlords, are the first to be repaid when a company goes bankrupt, the unsecured are only reimbursed if there is money left over, meaning employees' hard-earned gift card rewards could be rendered valueless.
Research and advisory firm TowerGroup reports that shoppers could close more than $75 million just from stores and restaurants in 2008. This figure doesn't include smaller businesses and services, which are at a greater risk during tough economic periods than large-scale corporations, and pose the biggest threat to gift-card holders.
With gift cards making up a sizable portion of the incentive industry, these are numbers incentive planners using retailer-issued gift cards will have to keep in mind. Cindy Mielke, president of the Incentive Gift Card Council's board of directors, posted a statement on their Web site several days after the bankruptcy was announced, acknowledging the challenges of the current economic downturn and offering the council's advice.
"We advise all our members and customers to do their research when choosing a business partner," reads the statement. "The question for all of us in business today is…'If your company is financially sound, what are you doing now to assure potential buyers of that fact?' Here is a tremendous marketing opportunity for you to stand out among other gift card and reward choice suppliers."
Planners concerned with the possibility that more companies may be facing similar situations as The Sharper Image should consider "open-loop cards," which are backed up by financial institutions like American Express or Mastercard.
"With network branded cards, you really have two areas of oversight, besides the financial institution’s internal area," says Paul Tomasofsky, chief operating officer of the Network Branded Prepaid Card Association. "You also have the brands of Visa, Mastercard, AmEx or Discover, as well as federal or state regulators."
But according to incentive industry leaders, the best security comes down to knowing your business partners. It was no secret that The Sharper Image was facing financial trouble, having posted net losses for three consecutive years. Planners who were aware of this likely avoided seeing any of their end users left with unwanted cards.
"The cautionary tale here has nothing to do with merchandise, gift cards or the incentive business. It has to do, as always, with 'with whom do you partner?'" says George Delta, counsel to the Incentive Federation. "Make sure you understand the financial footing and financial strength of your partner."
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