For retailers, freebies drive traffic, bring in new customers.
This holiday season, many retailers are discovering a big source of revenue that restaurants have been using to boost fourth quarter sales for years -- gift card bonuses.
Retailers such as Haskell's, DSW Designer Shoe Warehouse, Children's Place, and REI are joining local and national restaurants such as Olive Garden, Ruby Tuesday, Manny's, Salut and Punch Pizza in offering customers a freebie. Customers spend $25 to $100 on gift cards and get a free bonus gift card for $5 to $25. Some retailers, such as Haskell's, discount their gift cards instead, offering a $100 card for $80.
Bonuses, which took hold during the recession, are a big part of the reason gift cards remain popular. More than four in five shoppers plan to buy at least one this year, spending at least $155 for the cards, according to the National Retail Federation. That's the highest amount in the survey's 10-year history, amounting to about $110 billion in the United States.
"Bonus cards are effective at driving traffic, have a high perceived value and a great deal of consumer appeal," said Hal Stinchfield, CEO and founder of Promotional Marketing Insights in Orono.
Richard Anderson of Eagan spends about $500 during the holidays to take advantage of the bonuses at restaurants such as Houlihan's, Axel's, and Andiamo, getting more than $100 in bonus cards.
But the savings expanded to Target this year when his wife spent $50 to receive a $10 Redcard gift card during a recent promotion. "They're all good deals if you already plan to spend money there," Anderson said.
Retailers are just starting to catch on to the cash cow that restaurants have known about for years. Besides its recent $10 offer, Target is also offering bonus cards on specific items in its Sunday circulars.
Recently, anyone purchasing a Cisco Linksys router, a James Patterson kid's book, or a Braun razor at Target received a gift card for $5 to $20 with the purchase.
A 'profit center'
Although consumers love pocketing the savings, the bonus promotions are especially attractive to merchants. Twenty percent of all gift cards are not fully redeemed, according to American Express. While cards with a value of $100 or more have a high redemption rate, many cards for $10 to $50 never get spent, giving merchants a free ride.
"There's no doubt about it," Stinchfield said. "They're an absolute money maker for merchants."
Gift cards used to be an afterthought when they were introduced 15 years ago at Parasole restaurants, which include Manny's, Pittsburgh Blue, Salut, Good Earth and Muffuletta, but now they're a profit center, said Kip Clayton, vice president of business development and marketing for Edina-based Parasole.
The company's holiday offer of a free $25 gift card with the purchase of $100 in gift cards brings in millions of dollars in gift card sales each year, he said.
Redemption rates vary, depending on the merchant. Parasole's redemption rate is higher than average and has increased since the recession. "Before 2008, 15 percent of our gift cards went unredeemed. Now it's less than 10 percent," Clayton said.
The benefits for businesses don't stop there. Merchants see the bonus card offers as a way to bring in customers during the lull that inevitably happens after consumers get their credit card bills in January.
Bonus is like free money
When money is tight and people are reluctant to pile on their credit card, a gift card bonus is like free money, said Eric VanderSchaaf, director of marketing at Giftcard.com. Some restaurants and retailers restrict the bonus card to be redeemed only in January and February.
Bonus cards are also a cheap, easy way to gain new customers, said VanderSchaaf. Consumers will take a chance on a business or a restaurant they've never been to before with an incentive.
During the holidays, Clayton estimates that half the customers receiving Parasole cards, many of them bonus cards, are new customers. Typically, the company would need to spend $1,000 in marketing to gain one new customer at a 35-year-old restaurant like Muffuletta, Clayton said, but a gift card promotion accomplishes the same thing for much less.
Even better, most consumers spend more than the amount of the card, said Brad Wasz, co-founder and chief operating officer of Coupontrade.com. If a retailer knows that an average sale is $84, they might offer a bonus on a $100 gift card. The merchant gets a sales lift and consumers feel as if they got a raise with the freebie, he said.
The Electric Fetus music and gifts store in south Minneapolis began offering a $10 bonus gift card with a $50 gift card purchase for the first time two weeks ago. Retail music manager Bob Fuchs said he added the promotion as a way to keep up as a small business.
The store didn't expect to sell many cards, since it was a new offer. "I thought we'd sell 50 and we've already sold 300. It's amazing," Fuchs said.
Many businesses are seeing gift card marketing as a way to stay competitive. "It's a part of our marketing strategy," said Megan Behrbaum of Seattle-based REI. The company offered a $20 bonus with the purchase of a $100 gift card for the first time this year. "It's a way to stay relevant to our customers," she said.
Rewarding loyal customers
Merchants and consumers also see the bonuses as a way to reward loyalty. Anderson said he only buys gift cards at places where he would normally shop or eat, so nothing goes to waste. "The bonus keeps us going back more often," he said.
That's what merchants want to hear. Jackie Peters, owner of Jackie's furniture and accessories store in Excelsior, began offering a $50 bonus with the purchase of a $125 gift card this year. "Customers love it. They're very thankful," she said.
Savvy consumers know how to extend that goodwill into double savings, especially at retailers.
Pamela Banks, senior policy counsel at Consumers Union, which publishes Consumer Reports, said many consumers take advantage of bonus or discounted gift cards by buying items on sale. A consumer can take a $25 bonus card and buy items on clearance, maybe even with a coupon, to double or triple the savings, she said.
Still, consumers need to read the fine print. Many bonus cards have restrictions that ordinary gift cards don't. The bonus card may be valid for one or two months, unlike a standard gift card, which cannot expire for five years or have any inactivity fee until the card has not been used for 12 months.
If a merchant goes out of business, consumers with gift cards or bonus cards have little recourse. "Use all gift cards as quickly as possible," Banks advises.
John Ewoldt • 612-673-7633