The Gift-Card Economy

What do a gym membership, a bottle of prescription pills, and a holiday gift card have in common? You’ll have to read our New York Times Magazine column to find out. As always, we’ve posted some of the research behind the column elsewhere on this site. You’re welcome to leave comments on this post.

And thanks to Rory O’Connell, who got us thinking about this topic.


The article is up:


Companies do not recognize income when the card is purchased, it is shown on the balance sheet as a liability. The income is only recognized when the card is redeemed by the end-user or if it is estimated that they will never be redeemed.

The company does use the cash in the meantime, so effectively it is a free loan to the company.

I read and understood that Best Buy "earned" $43MM in 2006 due to unused gift cards, but the Sunday NYT article by our two favorite authors cited a figure of $16MM. When I read of the $43MM figure, $16MM was mentioned as realized earnings from only fiscal 2006.

I also hear that BB used to have a two-year expiration on GC's, but have recently changed that policy to cards that do not expire.

What am I missing here? Did they earn $43MM or $16MM in 2006 on unused GC's?


Found the detail of their statement. Breakage was not recorded in previous years, 2006 was tje first. It's a .pdf that cannot copy/paste from, but here is part of Paragraph Two of Page Thirty:

"...In addition, net earnings for 2006 included income of $43 million () related to our initial recognition of gift card breakage (gift cards sold where the likelihood of the gift card being redeemed by the consumer is remote). Gift card breakage was not recorded in fiscal 2005 or prior years"


I think Gym memberships are a different sort of animal.

If it was going to cost me $10 or $15 a shot, I would be hesitant to drop by for half an hour of exercise. But by paying a monthly fee, that is no longer a consideration, and I am free to use it.

This is similar to people who choose to own a car, rather than simply rent one for long trips when needed and otherwise take taxis. Even if owning a car is more expensive, the thought of taking a taxi every time you went shopping for groceries, etc. would be hard to take.

Chris Partridge

The article states:
"[the paper] showed that people who buy an annual membership to a health club overestimate by more than 70 percent how much they'll actually use it. Many people, therefore, would be better off buying monthly or daily passes."
Unless I have misread the paper, this was not the conclusion, which was that the average gym member consistently signs up for the worst and most expensive contract - the monthly option. Because most people go to the gym once a week, the best option is always a ten-pack of day passes, at $10 each. Next is the annual pass, because you get prompted to renew. The montly pass is most expensive ($17 a visit) because people fail to cancel when they stop going to the gym.


One interesting point is that, because of the concept you guys point out, successful value investors have long realized the relationship between gift certificates and insurance companies. The giver of a gift certificate makes money on the float which is a liability they have that goes away once the gift is redeemed (or, in the insurance analogy, a claim is made and then paid out).

For instance, in addition to buying some insurance companies in the 60s to start off his empire, Warren Buffett also bought Blue Chip
Stamps, which sold trading stamps to supermarkets that were then handed out to customers who collected them to then hand them in to claim prizes. Hardly anyone ever handed these in and Buffett would use the float created by the pool of money given to them by the supermarkets to buy more insurance companies, banks, See's Candies,

So while some guys were writing papers on this in the 90s, Buffett began amassing his wealth in the 60s by, in part, buying a gift
certificate company.



There is similarity between gift cards and pills.They are not of your selection and choice but the other parties.Preferences of others dominate.But what explanation for gym?


One problem with the article is "medicine cabinets of America are stuffed with billions of dollars of unused prescriptions.". In fact, medicine expires and so all value is lost (as in unused annual memberships, but unlike non-expiring gift cards or gym daily passes).
The other one is "An economist might describe a gift as a signaling mechanism". In fact, the vast majority of gifts are "obligations". That is, we are trained to provide gifts on specified occasions and the vast majority of consumers view these occasions as obligations rather than specifically a signaling mechanism. That is not to say they do not care about the person, etc, but simply that an economist should more accurately label this social behavior, because it explains much better why gift certificates are used (fulfills the obligation with least pain). The other side of the obligation is the recipient. If many recipients normally get gifts that they do not need/want (due to changing preferences, already having the item, lack of space, etc), then a gift card better satisfies both halves of the obligation.



I'm thinking Robert Nardelli ex-ceo from Home Depot and Catherine West (JC Penney) have a stash of unused gift cards hidden somewhere in their platinum parachutes.


The premise of the article seems to be that utility to givers derives solely from (a) using the gift as a signal of love, friendship, etc. to the recipient and from (b) maximizing the recipients' utility per dollar spent on the gift.

It seems to me this leaves out an important third reason for giving gifts (and third way that gift givers can maximize *their* utility). Namely, people often give gifts that the recipients may not necessarily want in the short term but that may cause the recipient to behave in a manner desired by the giver. For example, a parent may give The Joy of Cooking or a cookware set to his or her child upon the child moving into a new apartment.

This is not necessarily because the child has a great love of cooking, but because the parent wants to encourage the child to cook rather than eat junk food. In the end, these gifts will lower the cost to engaging in the desired behavior even if that behavior is not something inherently valued by the recipient at the time the gift was given. In this way, gift-givers may derive utility from shaping a loved one's behavior in a particular way and may give gifts to that end -- an end that a gift card or cash will likely not fulfill.



Given my infrequent visits to retail establishments, a gift of a Gift Card forces me to spend on an indulgence that I otherwise would be very unlikely to purchase.

Gifts of cash go into the bank account, and are likely to be spent in ordinary ways such as putting gas in the car, paying the mortgage, or invested in an IRA.

Constraints on spending options force the recipient to "splurge."

Mrs. Bickerson

I don't understand why so much prescription medication goes unused unless it's related to the fact that because health insurances cover it, meds are over-prescribed/unecessary and thus not consumed. If that's the case, that's irritating.

(By the way, someday can you talk about how much lenses and frames for glasses cost nowadays? Seems like quite the spike in cost since vision insurance was introduced.)


On #22 and 26 -

Starbucks has reported $2.2 BILLION in gift card sales in the last 5 years - see

I reckon, even by a conservative estimate, that only 80% of those are ever used, for several reasons -

1. Let's say you have a $10 card and have used $8 of the credit. I bet many consumers (including myself and JoeKeeley) won't pay with a giftcard unless it covers the whole purchase, so that last $2 often stays unused.

2. Lack of interest. Individuals usually buy gift cards from a vendor that suits the receiver. But, especially at Christmas, companies buy a lot of gift cards in bulk for employees, etc... that might not. Not eveyone drinks coffee, so many Starbucks gift cards distributed this way won't get used.

3. Loss. Gift cards are small and easy to lose.

Even though the company can't report the revenue on the sale of a GC, it can put the money in the bank (or better yet, invest it) until it's used (GOOD, like at the insurance company) or forever if it isn't (BETTER).

If my estimate is correct, or even close, this is of significant value for a company.

For Starbucks, that would mean they are sitting on $500 million, in the bank in reality and on the balance sheet as a liability, that they will never have to pay or report on the other side.

Insurance companies have to sit on some of this kind of money in case there is some sort of catastrophic event, like Hurricane Katrina, but companies who use GCs don't. They could fairly easily estimate how many will get turned in in the long run and there is little chance that there will ever be a 'run on gift cards', where all of the sudden, everyone turns them in at once.

If I am wrong and 100% of gift cards eventually get turned in, it's still a boon for two reasons - GCs depreciate over time as in-store prices rise and they have built-in profit. The company never pays out the total value of the card, only their own costs of the purchase. So this built-in profit is guaranteed from the GC purchase, whether the card gets used or not. It amazes me that they don't have to report at least that part.



Sometimes journalism and economics make pretty bad bed partners. The tenor of this article is just not supported by the actual data and is an excellent example of trying to apply theory to observation without bothering to understand the context or the value of the data observed.

For a major retailer, about 5% of card values are unredeemed. That fact is based on real transactional data as opposed to bad surveys by the Consumer Union (adult sample when most gift cards go to younger people) and PR-oriented data from Tower Group (which is entirely owned my MasterCard and which, surprise surprise, has a product that competes directly with retail gift cards).

On average consumers actually spend about 140% of gift card face value on purchases, clearly indicating that they feel they are getting good value.

Good retailers are actively trying to drive non-redemption down because they benefit tremendously from the incremental spending, reduced price sensitivity, and new customer acquisition. In addition, because of accounting methods they can not report gift card sales as revenue until they are redeemed so that actual performance is undervalued and distortion make exist in capital markets because of incomplete information. Good retailers also seek to reduce the negative costs associated with the prospects of increased governmental regulation and negative consumer reactions. Note, for instance, that Home Depot has a current campaign which promises a donation to the USO of a percentage of gift card redemptions during January.

I am surprised and quite disappointed in this because, in general, I really enjoy your work. In an area where I have some expertise (my first research in this area was 1993), this shows incredibly superficial understanding. Since, in the vast majority of areas I have no basis to evaluate, I have to wonder if all your work is equally lightweight.



The gift card is both an asset and a debit for the seller. The asset is the cash they received; the debit is the obligation to provide goods or services. They have no idea how much profit is made on the gift card sold until they meet their obligation and provide some goods or services. The gift card may buy items that are sold with a 50% margin or that are being sold at a loss. Until the final transaction occurs, you can only estimate the projected profits based on past history.

The New York times article also needed to explore in more detail the role of transaction costs. i.e. it may be easier to buy extra pills at the time of the initial transaction then, in the extreme, going for a pill each day. Even gym memberships involve transactions costs (mostly being forced to listen to the sales pitch). If you buy daily or monthly passes, you must endure another sales pitch on a regular basis.

Giving a gift card lowers the givers search costs and the transaction costs are minimal. It says something about the recepient of the gift card if the value of the card is insuffecient to overcome the transaction costs required (going to the store to shop) to redeem it.

I was difficult to shop for as a youngster, I sort of have have OCD over many purchases, and thus I am impossible to please. (One girlfriend did discover that buying lingerie for her to model was a gift I always seemed to appreciate. My desire to research the product was minimal but my interest in the end product was - strong.)



With gym memberships, I've wondered what would happen if fitness centres offered membership options where a larger monthly fee was charged but members were reimbursed or paid for every time they visited (The same ‘Why Not?' thinking that suggested telemarketers should pay you to listen).
It would be easier for enthusiastic new members to rationalize the price by saying ‘I'm gonna go five times a week so really it's barely costing me anything', and when their participation wanes after several weeks/months the gyms would cash in.

Gyms typically sell far more memberships than they could possibly accommodate. If more than a relatively small percentage of the members actually showed up on a regular basis the gym would be utterly overwhelmed.


I agree with #13 in reference to how limiting a gift card is. Putting the "social taboo" aside, cash is a much better option. When you give a gift card as a present, you might as well just say to the reciepent:
"Here is some money that used to be perfectly good everywhere, but now only Starbucks will accept it."


Does anyone else think this is all totally pathetic? Adults of more or less equal status (i.e. not parent to child) handing each other cash or cash equivalents completely misses the point of gift-giving.


As someone that worked in the financial aspect of this industry for a number of years, there seems seems to be some confusion on the topic of unredeemed gift cards.

I agree with an earlier post that the article is misleading in a sense.

Each State has its own "Escheatment" laws that dictate when unclaimed funds are to be remitted to the State. Usually its 3 to 5 years from the date of last use. The Escheatment laws in a few States do not address gift cards in anyway and retailers in those States will eventually record that "un-redeemed" balance of the gift cards as income. I say eventually as you still need to prove to your accountants that the liability on your balance sheet will never be paid (ie the gift cards will never be redeemed). There is also a US tax regulations that would cause, for tax purposes under certain circumstances, for some companies to include the unredeemed balance in income after a period of 2 years. Most States have an unclaimed property law that catch gift certificates.

Now, here is the rub. Gift cards, for some retailers, have the ability to be reloaded. There is a opinion that these do not constitute a gift certificate. Many States are having trouble dealing with this fact, as the new technology age was never considered when some of these laws were drafted. (No different with chip based cards - they have no idea how to define or catch these type of cards). As such these cards and the eventually unredeemed balance are therefore free to the company (eventually).

There is a belief that setting up a company, in a State where no Escheatment law exists, and this company runs the program and therefore owns the liability and the cash, that no reporting requirement exists - and as such get to keep the "breakage". Again, depends on how good you set this up, your agreements, etc. However, this is difficult to defend as the sale of the card occurred in a certain State and that State will argue the money belongs to them. This will become more and more of an issue in time and I wouldnt be surprised if some States start suing some larger retailers for the cash that should be paid to the State.

California is probably one of the most proactive states in this area.

Gift cards from a retailers perspective is great. Interest free loans from your customers. In some case this could be a high as 10 to 15% of the line of credit of some retailers. As such they are saving money on the interest costs, where that exists.

Also there was a comment that non-redemption rates are in the 5% range. True for food based operations. For other types of retailers, the number is probably closer to 10%. And interestingly enough, the smallest and biggest gift cards are the most un-redeemed cards. Why? Well for a $10 gift, it is too much trouble to go to the store to spend $10. For $100 or more, people wait for a special purchase and hence sit on the fence longer and evetually forget about it.

My suggestion - never gift a card card with more than $50 on it. Actually cards with between $25 and $50 are used the most.



Gym memberships.

Places like the YMCA/YWCA, Jewish Community Centers etc, have a community aspect to them. Profit oriented places like Bally's are profit centers that offer very little outside of a weight room and cardio.

What you buy with at a Y membership, for example, is access to a facilty that offers a wide variety of activities such as a swimming, basketball gym, sauna, childrens activities, summer day camp etc.

I find that the Y is a great place to make friends, network, and socialize. I often just go to the sauna and relax with my great group of friends that I have met over the years. It's a lot cheaper than going to the bars.

It's true that in January gym memberships increase. I work in membership sales at a Y, and the public just can't help themselves after the new year begins. Because we are a non-profit, the dues also support other programs.

Health insurance companies are now offering $20 monthly discounts off your monthly dues if you work out at least 12 times a month. For those who choose to stay healthy it's a great bargain. $240 bucks a year just to stay healthy. It's also an incentive to keep people motivated. I see this first hand every day.