Breakage Is Dead

by Ben Jackson 0

Nearly every large retailer in the United States sellsgift cards with the thought that one way or another, the card willbe spent, and they will eventually collect the money associatedwith those cards. But they view the money associated with the cardsprimarily as an accounting liability, rather than as seeds forfuture sales.

Until those gift cards are redeemed, theyare a financial liability for retailers, because the moneyassociated with those cards is money the retailer owes to thecardholders. If the cards remain unredeemed after a period of time,then the retailer treats the funds as found money and moves it tothe income side of the balance sheet. This is known as breakageincome.

Instead of thinking of this money as abonus, retailers should view it as a consolation prize for lostsales and lost customers. It is a consolation prize that will beharder and harder to collect based on recent legislative activity.This note will use real world examples to show the potential incomelost when cards go unredeemed and discuss some steps a retailercould take to measure the potential for additional revenues thatcome when gift cards are fully redeemed. Viewed this way, breakageis not an income stream, but the measurement of aproblem.

Collecting breakage is not as profitable as havingcustomers come into the store and redeem the card because theytypically spend more than the face value of the card. This is knownas uplift, and it totals up to millions of dollars in revenue eachyear.

In addition, state laws around abandoned property, alsoknown as escheatment laws, mean that companies are often forced toturn over unused gift card balances to the state government. Thesevary from state to state, so retailers are facing 50 different lawswhen they operate a gift card program.

The best approach for retailers is to develop cardprograms that allow them to gather information on the gift cardholder and encourage them to redeem the cards quickly.

For more information on the breakage problem and somepossible solutions, see the Breakage Note under the PrepaidAdvisory Services library at the Mercator Advisory Group web site.(