Why gift cards are evil.

Commentary about business and finance.
Jan. 4 2005 3:45 PM

Why Gift Cards Are Evil

They're the best insult money can buy.

Illustration by Mark Alan Stamaty

What do you buy when you're too lazy to find a real present? Probably a gift card. In a Christmas shopping season that lacked a must-have product, the most successful item may have been that nondescript, infinitely malleable slice of plastic.

Gift cards, which came on the scene in the late 1990s at Blockbuster and Neiman-Marcus, have spread into every nook of the vast retailing sector. Wal-Mart sells them for as little as $10. Barnes & Noble offers them. Fast-food joints like McDonald's and Dunkin' Donuts are getting in on the act. So is American Express. A survey released last October by ValueLink, which creates gift cards for companies, estimated that in the previous 12 months, 64 percent of American adults (139 million people!) either bought or received a gift card, up from just 37 percent in 2002.

After Christmas, Bloomberg news reported that sales of gift cards in the 2004 holiday season may have exceeded the National Retail Federation's prediction of $17.3 billion. Michael Niemira, chief economist at the International Council of Shopping Centers, has suggested that 11 percent of holiday sales may have been embedded in gift cards. AndProvidence College marketing professor Dan Horne, a gift card specialist, said Americans likely spend between $40 billion and $45 billion annually on gift cards.

The appeal of gift cards is obvious. They save time and mental energy for purchasers, who don't have to struggle to choose the right present. A $50 gift card from Barnes & Noble somehow seems more thoughtful than simply slipping two twenties and a bunch of wrinkled ones into an envelope. For recipients, gift cards ward off the uncomfortable and highly inefficient process of receiving and returning unwanted gifts. Every recipient of a gift card can be honestly and genuinely gracious—who doesn't like free money, after all?

Retailers love gift cards most of all. They're high-margin, low-maintenance sales that can be easily conducted online. They stimulate much-wanted traffic in the post-holiday season doldrums of January and February, especially at restaurants. And to the extent gift cards save merchants the expense and hassle of handling returns of unwanted gifts, they are a huge boon.

So, what's not to like? A few things. Buy a gift card and you're essentially lending cash to the retailer today that is paid back through merchandise tomorrow, or next week, or next month. ValueLink reported that 27 percent of those in its survey blew the cards out within seven days, and another 31 percent did so within a month. Which means that about 42 percent of cards retained some cash value on them for at least a month. Wal-Mart and Neiman-Marcus can borrow all the cash they want from banks or the bond market on rather favorable terms. Do they really need us to extend short-term interest-free loans to them?

And gift cards frequently carry a price for their recipients. Walking into a store with free money in your pocket is like walking into an all-you-can-eat buffet after fasting—you'll feel psychologically impelled and entitled to consume more than usual, because the short-term cost will seem lower. "When customers go into the store, they don't feel constrained to just stick to that card," said Karen Larsen, vice president of global marketing and business development at ValueLink.

That's one of the reasons retailers issue gift cards in low denominations. The Neiman-Marcus $50 gift card won't go very far on its own. Ditto for the $10 card at Wal-Mart. Indeed, ValueLink said that 55 percent of those in its survey spent more than the initial value of the card they received. (In an exquisite example of how commerce blasphemously adopts sacred language, such incremental spending is referred to in the industry as "uplift.") Dan Horne says that "the evidence is that there is incremental spend of 40 percent." But he hastens to note that some shopping experiences are far more uplifting than others. A core Wal-Mart shopper with a $100 gift card might spend $110 on his next visit, providing a mere $10 of uplift. A core Barneys fashion victim, armed with a $100 gift card, might spend $200.

Finally, depending on the recipient's self-esteem and level of paranoia, gift cards can seem a wee bit paternalistic and controlling. Gift cards are tailor-made for recipients who are irresponsible or deficient in taste and self-awareness—or who are simply prone to feeling that way. Give your teenager $50 and she might blow it on midriff-baring halter tops at Abercrombie & Fitch. But that J. Crew gift card can be spent only on presentable clothing. Dismayed that your boyfriend's recent reading list extends only as far as Maxim? A Borders gift card could send a message. For the insecure male on your list, a Thomas Pink gift card could be a not-so-subtle hint that his shirts are blighted with ugly stains.

So, let's review. A gift card is great. But every moment you don't use it, Wal-Mart or some other giant retailer is collecting interest on the giver's cash. When you go to redeem it, chances are you'll end up spending some of your own coin. And it probably reflects the giver's implicit criticism of your poor taste and untrustworthiness. Aren't you glad Christmas is over?

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.