A Not-so-simple Gift

Troubled economy presents challenge for those giving or receiving gift cards this holiday season

November 23, 2008|By Andrea K. Walker | Andrea K. Walker,andrea.walker@baltsun.com

They don't offend. They're easy to pick out. And people love to get them.

Gift cards have mushroomed into the most requested holiday gift by consumers. Nearly 55 percent of people want to receive a gift card this year, according to the National Retail Federation.

But the troubled economy is likely going to affect the way you and other consumers spend on gift cards. And there are more precautions you should take when buying one this year.

If you do get a gift card, it might not be for as much as it was in the past. Cash-strapped consumers dealing with falling home values, declining credit lines and rising food costs are spending less on gifts. So your mom might give you a $50 gift card instead of $100 like last year.

You're also probably going to buy and ask for more practical gift cards - say, for gas or a grocery store, as opposed to your favorite clothing store like Banana Republic or Arden B. Consumers who get gift cards are also more likely this year to choose to spend them on necessities. Your mom might use the Wal-Mart or Target card you get her to buy dish detergent and trash bags, and not the perfume or sweaters you might have had in mind.

Many of you are more likely this year to forgo gift cards altogether and instead buy cheap gifts from the tons of bargain racks that are expected at stores this holiday season. Why get a $20 gift card when you can buy a $10 sweater?

"Gift cards don't go on sale," Ellen Davis, a spokeswoman for the NRF, said on a recent conference call. "For budget-conscious consumers they're not as attractive as they once were."

The retail group expects spending on gift cards to fall 5.6 percent this year because of the economy, even as the popularity and demand for the cards grows. Archstone Consulting expects shoppers will spend $25 billion on gift cards, down 25 percent from 2007.

Consumer watch groups and retail experts are also warning you to be more cautious about buying gift cards this year. As shoppers cut back on spending, it's putting more pressure on retailers trying to meet their bottom lines. The tough season is expected to push some retailers into bankruptcy reorganization, and others might not make it through the season at all. Retailers such as Boscov's department stores, Sharper Image, Tweeter and Circuit City have already been forced into bankruptcy.

When a company declares bankruptcy, it doesn't have to redeem gift cards. It's up to the retailer. Circuit City, which recently filed for Chapter 11 reorganization bankruptcy, said it will honor gift cards. But Tweeter, which is shutting down all of its stores by the end of the year, including seven in Maryland, initially said it wasn't. The Maryland attorney general's office joined three other states in filing an objection to Tweeter's plans to honor gift certificates only through Nov. 15. Tweeter agreed to honor them until the stores close.

The only way to use your gift card from a bankrupt retailer is to file as an unsecured creditor with the courts. The process can be long, and there's no guarantee you'll get your money, since other creditors and administrative costs are ahead of you.

"It's going to be more of a hassle," said Steve Sakamoto-Wengel, deputy chief of the consumer protection division at the state attorney general's office.

Experts say you should pay attention to the finances of stores where you are planning to shop. Are earnings significantly down? Do they appear to be running out of cash? You don't want your loved ones to be caught with a card they can't use.

"You have to think about the health of your retailers," said Ellen Cannon, managing editor at Bankrate.com. The finance site surveyed 20 retailers that it said are probably safe bets for gift card buying because they're stable companies. They include stores such as Wal-Mart and Target.

"The consumer is going to have to be smart about who is going to survive and who is not," said Michael Imber, a director in the corporate advisory and restructuring practice of Grant Thornton.

But it's not always so obvious that a company is having financial problems.

"Most consumers don't have the means or inclination to know who is going to survive," Imber said.

Many of you have decided not to take the risk, according to some surveys. America's Research Group found that 64.4 percent of people who normally give gift cards will instead give cash because they are worried about companies going out of business.

"If the consumer gets wind that there is a problem retailer in their midst, the safest thing to do is avoid buying the gift card," said Kevin Regan, a senior managing director in the retail practice of FTI Consulting, a Baltimore-based business firm. "But that can be hard for a consumer to forecast."

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