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Gift-card sales rise after falling for two years

By Ylan Q. Mui
Washington Post Staff Writer
Monday, December 27, 2010; 10:38 PM

The gift card is back.

For the first time since the economic downturn began, sales of gift cards are slated to rise this holiday season amid a broader resurgence in consumer spending. That is expected to help make the week after Christmas particularly lucrative for retailers as shoppers return to the malls to redeem their cards.

According to the TowerGroup research firm, sales totals for the cards will rise nearly 5 percent, to $91 billion, this year after falling for the past two years. Typically, more than half of the cards are redeemed in the month after Christmas. The firm predicts that the industry will hit the $100 billion mark by 2012.

The gains are being driven by consumers' growing confidence in the economy and the retail industry, which suffered several high-profile bankruptcies in the wake of the recession. In addition, federal consumer protections on the cards that took effect this year may be helping to ease shoppers' minds.

"We're not at 'Happy days are here again,' but things are certainly better," said Brian Riley, a senior research director at TowerGroup.

Consumers began flocking to gift cards about a decade ago as quick, convenient - and often last-minute - holiday presents. The cards also proved a boon to retailers because shoppers tend to spend more money when using gift cards and buy more items at full price. (Retailers cannot count a gift-card sale as revenue until it is redeemed.)

But the industry's growth hit a wall in 2008 as the recession took hold. The demise of big-name chains such as Linens 'n Things and Sharper Image made many consumers wary of purchasing gift cards for fears that the value could be lost. In other cases, shoppers were able to score merchandise so deeply discounted that a gift card often became unnecessary.

Now, as the freeze on consumer spending begins to thaw and many retailers report better-than-expected holiday sales, gift cards are staging a comeback. Many chains are dangling the cards as part of their promotions - Toys R Us is giving away $20 gift cards with the purchase of a handheld Nintendo DSi - and even touting electronic gift cards delivered through e-mail or Facebook. Some stores also schedule new products to arrive the week after Christmas to lure in shoppers wielding the cards.

"Gift-card holders can come in and get fresh merchandise and not dig through holiday leftovers," said Kathy Grannis, a spokeswoman for the National Retail Federation. The trade group predicts shoppers will spend an average of $145.61 on gift cards this season, compared with $139.91 last year, a 4 percent jump.

D.C. resident Natalie Alhonte got a $50 gift card from athletic-apparel store Lululemon for Christmas and plans to redeem it this week. She recently had a baby and is trying to inspire herself to lose a few pounds - at the right price, of course.

"I figure there might be some sales this week," Alhonte, 27, said as she browsed the deals Monday at Macy's in downtown Washington.

Alhonte and her friend Korina Smith, 27, said gift cards ranked high on their wish lists, both to give and to get.

"I don't want to receive a gift I don't like," Smith said. "I'd rather get something I love."

"It just saves you a step" of returning an unwanted present, Alhonte said.

Gift cards may also get a boost from new federal regulations that limit expiration dates and fees for the cards. The rules, which took effect in August, require cards to be honored for at least five years and prohibit "dormancy fees" during the first year for not using the card. The law also allows only one fee per month.

The new regulations apply to store gift cards and prepaid cards that can be used at multiple locations. But it does not apply to reloadable prepaid cards that function as replacements for checking accounts.

Riley said he expects the rules will help reduce the amount of money on gift cards that goes unspent to $2.5 billion, or 3.1 percent of the market, which is about half of the amount unspent in 2008.

Though retailers are hoping gift cards will help them finish the holidays on a high note, they are unlikely to make or break the season. Craig Johnson, president of the retail consulting firm Customer Growth Partners, said this week is likely to be considered a bonus to a strong season.

"Anybody that has already not had a good season by now is not going to suddenly have one because of this week," he said.

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