Call them the gift that kept on giving — up to a point: For years, gift cards have helped boost sales and revenues for retailers and other merchants, not only during the last few holiday-shopping seasons, but also as sales were recorded in subsequent months when a majority of those cards were used. Unfortunately, sales of these popular vehicles are expected to decline markedly this year - perhaps as much as 9 percent overall -- according to a pair of newly released industry reports.

The decline in gift-card sales means that merchants will be challenged to build customer relations through other channels, says Brian Riley, bank cards practice research director for TowerGroup, which produced one of the reports. "Gift cards are a great way for a retailer to build loyalty," he says. "There's a lot of anxiety about how to counteract the loss of gift-card sales."

TowerGroup predicts a 9 percent drop in gift-card sales due to several factors, including:

• a decrease in retail sales;
• lack of consumer confidence in retailer-sponsored gift-card products; and
• a shift to branded products from financial institutions which permit the gift card to be used on consumable products such as groceries and gasoline.

All of these factors can be traced, in varying degrees, to the downturn in the United States economy, according to the research firm.

TowerGroup projects that 2008 gift-card sales will total $88.4 billion, a decrease of 8.9 percent as compared to 2007. But not all the pain is being distributed evenly. Sales of private-label gift cards should generate $59.9 billion in total sales through the end of 2008, compared to $70 billion in 2007, a drop of 14.4 percent. Sales of branded cards from financial institutions, on the other hand, are expected to grow from $27 billion in 2007 to $28.5 billion in 2008, a 5.6 percent rise.

The merchants who will suffer the least, according to Riley, are the ones at the low end of the market, such as Wal-Mart and quick-service restaurants.

The National Retail Federation (NRF) also forecasts a decline in the sales of these products, though the trade group's projection is not quite as severe as TowerGroup's. NRF's sixth annual Gift Card Survey, conducted by BIGresearch, found that gift-card sales will fall nearly 6 percent this holiday season to $24.9 billion, down from $26.3 billion last year. Fewer people plan to purchase gift cards this year (53.5 percent this year, compared to 56.6 percent last year) and gift-card shoppers will be spending less overall on the average card ($147.33 versus $156.24 in 2007).

"Since gift cards never go on sale [at a reduced price], some price-conscious shoppers will be passing up gift cards in favor of holiday bargains," said Tracy Mullin, NRF president and chief executive officer, in a prepared statement. "Retailers may need to make minor adjustments to holiday plans as fewer people may be hitting the stores in January to redeem gift cards."

Another concern among some consumers is the viability of gift cards from retailers that have a shaky financial outlook, such as Circuit City. If the gift-card issuer goes under, the cards often become worthless, Riley says. Sensitivity to this issue intensified this year, when more than $100 million in gift-card value became compromised following the bankruptcy filings of retailers Linens ‘N Things and The Sharper Image, according to Tower.

[Editor's note: A list of recent bankruptcies and store closings in the retail sector can be found on destinationCRMblog.com.]

News relevant to the customer relationship management industry is posted several times a day on destinationCRM.com, in addition to the news section Insight that appears every month in the pages of CRM magazine. You may leave a public comment regarding this article by clicking on "Comments" at the top; to contact the editors, please email editor@destinationCRM.com.