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The Gift-Card Economy

Shoppers put $90 billion on gift cards last year. A few entrepreneurs saw an opportunity.
October 19, 2009
URL: http://www.entrepreneur.com/article/203738

As the holiday shopping season kicks off--and merchants brace for another lean year--a small group of online entrepreneurs is setting up shop around one of retail's only bright spots: The gift card.

Yes, the gift that says "I put almost no effort into this" has morphed into a $90 billion industry, according to the TowerGroup, a Massachusetts research and consulting firm. Sales of gift cards--that is, any card issued by a merchant redeemable for goods and services--jumped to $97 billion in 2007 from $57 billion in 2005. While the dollar figure dipped in 2008, First Data, a retail tracking service, found that shoppers actually bought more gift cards than the year before; they just loaded less money onto them.

"When the dust settles, we see gift cards surpassing $100 billion by 2012," said Brian Riley, research director for the TowerGroup. Online entrepreneurs who've built businesses around the phenomenon are banking on it. Here's how they're cashing in on plastic fever:

GiftZip.com
What it is: The gift card without the card. Shoppers choose a merchant "card" and an e-gift card pops up in the recipient's inbox, which can be redeemed in-store or online. "My intent was to take that department-store kiosk model and put it online," says founder Sam Hogg, who came up with the idea while taking a Sustainable Supply Chain class at Michigan State University.

Who's in: The mass (Forever 21, Target) and the deeply niche (Culinary Teas, Glitzy Pet Jewelry)

How it pays off: Merchants compensate the East Lansing, Mich., company by paying a percentage of sales, or paying to have traffic driven their way or their logo placed next to a big company like Target. GiftZip began in June; Hogg expects to break even early next year.

PlasticJungle.com
What it is: A trading post for new and used gift cards. Consumers can buy, sell and trade--but Plastic Jungle's sweet spot is liquidating cards, with users getting 65% to 85% of the card's value, depending on the popularity of the merchant. Plastic Jungle resells cards at a discount (10% to 15% below face value). "We provide a way for people to live at a discount," says Tina Henson, founder and executive vice president of strategy.

Who's in: A hodgepodge of 140 retailers, including Old Navy, Sears, CVS and the Cheesecake Factory.

How it pays off: Since launching in 2006, the Mountain View, Calif., business has seen 60% growth quarter after quarter, but hasn't turned profitable. Still, Henson landed venture capital in March, and a new CEO-former eBay chief marketing officer Gary Briggs.

Shared Progress
What it is: Three gift-card websites: GiftCardBuyback.com, where users can unload cards for 64% to 83% of their value; GiftCards- Again.com, which sells cards at a 3% to 20% discount; and GiftCardDonor.com, which accepts cards on behalf of nonprofit groups including the March of Dimes (charities get 75% of the revenue). Jeff Kister, CEO and owner, started the site when he noticed his wife's unused gift cards.

Who's in: Anything goes--from Baja Fresh to Build-a-Bear Workshop.

How it pays off: The Columbus, Ohio, company launched its gift-card sites in 2005. Shared Progress "about breaks even," says Kister, who adds, "that was what our goal was anyhow--to break even."

Swapagift.com
What it is: A way to get cash quick. A pioneer in the used gift-card market, Swapagift lets consumers mail in cards they don't want or bring them to one of 600 Swap-agift kiosks inside financial services storefronts such as Western Union. "Brick-and-mortar locations have been a great way to set us apart," says Mary Jane Kelly, who co-founded the company with her husband, Michael.

Who's in: Any valid gift card is accepted, with buy-back rates dependent on popularity.

How it pays off: The Langhorne, Penn., company, which was bought in 2008 by Wolfe.com, LLC, has grown 200% annually since launching in 2003. "The allure of this business is that everybody wins," Kelly says.

LeverageCard.com
What it is: An online management system. Buy, swap or check card balances--and earn interest (1% APR on cards from merchants offering online balance checks, including Target and Starbucks). Mark Edward Roberts (with Jennifer Mathe) launched the company in 2007 after misplacing a cache of gift cards. Register cards on the site, and lost plastic isn't a problem--the numbers
are on file.

Who's in: About 200 merchants, heavy on restaurants, entertainment and mass retailers.

How it pays off: The Santa Ana, Calif., company is still in startup mode, says Roberts, who hopes to step up revenue by charging retailers for a targeted consumer base, based on preferences in gift cards. "It only makes sense to use the information we gather," he says