By Jason Wolfe, Founder and CEO of The Wolfe Companies  

The holidays are here, and gift cards remain a popular choice for consumers looking for flexible and convenient gift options, but what about investors and retailers looking for a different kind of return? Beyond their utility as a simple gift, these financial tools carry significant implications for the broader economy and investment sector. As physical storefronts give way to digital marketplaces, gift card makers have a chance to seize the moment and fix some of the long-term issues that have beset their industry, unlocking a significant amount of frozen capital and possibly even changing the very name of their product. That day isn’t here yet, but it’s coming, and understanding the nuances of this sector is crucial for investors, retailers and consumers alike. 

An Uncharted Industry

One of the most significant problems for investors looking into the gift card industry is that the majority of large companies are private. This makes it hard to assess the relative health of an organization as one could with the annual reports of a publicly traded company. However, there are signs that indicate whether a gift card company is doing well. The least subtle of them is scale. Gift card merchants operate at very narrow profit margins, usually around 5%, so while a company doing $20 million in revenue might be appealing in another industry, in the gift card space it may not be that exciting. Now, if a company is making $500 million, that’s a more attractive opportunity.

Beyond sheer scale, investors should also look at how companies are combating two of the main issues besetting the gift card industry: pollution and fraud. Gift cards create a lot of waste, they are disposable plastic after all, and fraudsters use these financial tools in all manner of schemes. Gift card companies working to tackle these issues will be on firmer footing than those that don’t, so look into a company’s fraud percentage and what percentage of their produced product is digital as opposed to plastic.

There is potential for a gift card company to return to the public space, and that should excite investors, because going public will bring higher pressure for a large player in the industry to be environmentally friendly and to work to reduce fraud. The increased pressure will also prompt them to improve their core product—that is, gift cards—which as we’ll see has huge economic potential. 

Economic Strengths and Weaknesses of Gift Cards

Gift cards also represent a huge opportunity for retailers. On average, a consumer who’s going to spend a gift card will spend 27% more than the value of the card, which not only increases total sales but also introduces new customers to brands. 

However, because gift cards are typically linked only to a single brand, many of them go unspent by people who receive a card from a merchant they don’t like. In fact, an estimated 7-8% of gift cards go unused—translating to billions of dollars of frozen capital that could otherwise stimulate economic growth. Legislative measures such as the CARD Act have protected consumers, ensuring that these funds don’t expire unused. But the onus is on industry innovators to devise solutions that ensure every gift card is redeemed, channeling those funds back into the market. 

How We Got Here

If it seems strange that a product designed to be a flexible gift has become a little unwieldy over the years, that’s because it is. To understand why gift cards work the way they do, consider the market forces working on them today—the primary retailers of gift cards aren’t creating them to be the perfect gift for their recipients; they’re creating them to boost their own sales. That’s why there are clearly demarcated lines between brands, and why a lot of thought has gone into making gift cards as visually appealing as possible while little has gone into making them sustainable. But things can’t go on this way. It’s not what’s best for consumers, and it’s not what’s best for the planet. For the industry to grow the future of gift cards will have to be more about the gift and less about the card.

The Future is in the Cards

The core problems one needs to solve here are the card utilization ratio, the environmental impact, and the fraud. To do that, one would need to create a card that is linked to a secure and flexible source—say a recipient’s bank account—and allow them to spend the funds at a merchant of their choice. The obvious accompanying step would be to take cards digitally—which many gift card companies have already done—but cards themselves will remain popular with some for a long time. The solution for this is simply to make them from something like bamboo which will allow people who want the tactile element of cards to use them without costing the planet. 

As we look towards a future where the term ‘gift card’ may become archaic, the emphasis will undoubtedly be on the gift, and that emphasis will spark economic growth and opportunities for investors and retailers to capitalize on a product truly designed for the people who use it. The gifts of the future will ensure that the love and thoughtfulness behind each transaction are fully realized, and every dollar is spent.

About the author: 

Jason Wolfe is the Founder and CEO of The Wolfe Companies. He is a serial entrepreneur and community leader serving on several boards including the Board of Managers of the Milton Hershey School and the Board of Directors of the Hershey Trust Company. He’s been awarded the Ernst and Young Entrepreneur of the Year Award, the Governor’s Impact Award, The Pittsburgh Business Ethics Award, and many others including the Carnegie Science Center’s Award for Top Entrepreneur in Pittsburgh. His vision of the ‘perfect gift’ that focuses on the recipient is the purpose of the company. He fosters a core culture of caring, teamwork, drive, and integrity.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Original: Investing Feed: The Gift Card Market: What Investors Need to Know About This Opaque Industry