Gift Cards Can Be a Form of ‘Free Advertising’ for GOB Sales, writes veteran liquidator

In article for leading asset-based lending magazine, Tiger Capital Group’s Michael McGrail cites advantages of honoring gift cards during liquidation sales.

BOSTON (6/18/14)—When retail stores are in liquidation, creditors often see honoring customers’ gift cards as a losing proposition, to put it mildly. But in the May/June issue of ABF Journal, Tiger Capital Group COO Michael McGrail advises the asset-based lending community to carefully consider the advantages of honoring gift cards during GOBs.

For one thing, failure to honor gift cards can create a public relations debacle: When the media tell shoppers their unused gift cards from a bankrupt chain are now useless, the resulting outrage can hamper efforts to promote the sale, McGrail says. By contrast, he notes, honoring gift cards for an advertised 30-day or other timeframe can help drive traffic to going-out-of-business sales. “A GOB event represents the last chance for shoppers to spend their cards,” McGrail writes. “The fact that they are holding something of real cash value, with a clearly defined shelf-life, acts as a powerful incentive to get people off their couches and into stores. In a sense, gift cards are a form of free advertising for the GOB.”

In the column (“Gift Card Redemption in Liquidation: Weighing Potential Benefits to Creditors”), McGrail cites research from CEB Tower Group noting that Americans loaded approximately $124 billion onto gift cards in 2014 alone.

“Many of these cards have been stuffed into wallets or shoved into junk drawers for months or even years,” he writes. “Beyond that, millions of Americans are also walking around with cards given to them by retailers in lieu of cash during the processing of merchandise returns.”

Typically, today’s value-conscious shoppers will strive to spend all of their cards’ outstanding balances rather than leave anything left on them. In most instances, this results in consumers at GOBs spending cash over and above the actual balance on their cards, McGrail explains. This was part of the reason why, when orchestrating a national liquidation event last year, Tiger and its joint venture partners went a step beyond gift cards and honored points from the retailer’s rewards program throughout the sale. “With hundreds of millions of dollars worth of inventory in the offing, the joint venture wanted to keep the retailer’s loyalty-program customers coming into these stores for as long as possible, as often as possible,” McGrail writes. “Sending an e-mail to them that stated, ‘Sorry, but your rewards member status is now null and void’ would have been ill advised.”

Ultimately, the question of whether to redeem gift cards or rewards points should be answered on a case-by-case basis, McGrail writes. Factors to consider include:

• Higher-profile, national chains witness higher redemption rates than regional players due to significant pre-sale advertising budgets and increased press coverage.
• The age of the card is a major factor in projecting redemption rates. Generally, there is an inverse relationship between the age of the card and the likelihood of its use.
• The average redemption rate for most deals is roughly 35% in the aggregate.
• There is a direct relationship between the denomination and the redemption rate. For example, if the GOB involves a high-end jeweler with an average outstanding gift card balance of $1,000, the lender can count on an extraordinarily high redemption rate (as contrasted against the likes of lower-end chains like KB Toys or Blockbuster).