Consumer confidence in gift vouchers has taken a drubbing after a number of recent high-profile administrations. As fashion retailer Republic plunges into administration, Rebecca Thomson examines the implications for the gift card market.
For consumers, there is probably little more annoying than turning up to spend a gift voucher to be told it won’t be accepted. Being unable to use something that has already been paid for is a baffling experience, and shoppers at HMV, Comet and Jessops have made their feelings clear about the problem over the past couple of months.
Gift vouchers at all these stores have at some stage been rejected as the administration process unfolded, and awareness of the risks inherent in buying gift cards at financially unstable retailers is growing among shoppers. Today fashion chain Republic entered administration, and consumers will probably already be wondering if they can still spend their gift vouchers there.
That has raised concerns that shoppers will start to shun gift vouchers and give cash instead. “It may turn off some customers,” admits Andrew Johnson, director-general of the UK Gift Card and Voucher Association. But he flags that the spending could simply shift to other retailers. “It could also have a positive effect on some brands,” he says.
So are HMV, Jessops and Comet’s recent problems just a blip, or could they have longer-term implications for the gift card market? As Danny Dartnaill, a partner at accountancy firm BDO says, consumers are generally quick to avoid something if they’ve experienced problems before. “Consumers on the whole are a fairly savvy bunch, and it could be a case of once bitten twice shy,” he says. “If they have lost money in the past, people will be more reluctant to buy them in the future. They have an understanding now of the risks.” Johnson acknowledges it can be a particularly frustrating situation for shoppers. “From the consumer’s perspective, it doesn’t make any difference whether the store is in administration or not. They will still ask ‘why yesterday could I spend it, and not today?’”
But while those directly affected might be unsure about buying vouchers in the future, the gift card and voucher market in the UK is worth £4.65bn a year, according to the UK Gift Card and Voucher Association. That’s not an insignificant proportion of total sales, which were £311bn in 2012, according to the ONS. Could such a sizeable part of the retail industry be affected by a problem that has been limited to a small number of retailers?
Johnson doesn’t think so. “It’s a big part of retail, and it’s a part that’s been growing significantly - around 5% a year for the last 10 years,” he says. “The negative publicity is a concern, but our view is it’s a very strong market and has long-term sustainability.”
He concedes consumers may tweak their buying habits in response to the problems, saying: “It may be that consumers move their gift card spending into very trusted retail brands.” That is good news for retailers that have generated positive press recently, such as John Lewis, but bad for any retailer having a tough time financially.
There is also the possibility of consumers shifting spend to multi-retailer vouchers, such as the One4All card that is accepted by 60 retailers including Boots, Topshop and Argos. Lynda McGovern, marketing manager at One4All, says the company expects no problems as a result of the recent issues. She maintains: “We believe that the recent problems will in fact provide the consumer with greater confidence in One4All.” Johnson points out that the recent problems were nothing to do with the gift card schemes themselves, but a fall-out from the process of administration. “The biggest issue with HMV and the others was an issue about administration - there’s not something fundamentally wrong with gift cards and vouchers.”
The problems arose because an insolvency process means all cash available to the retailer must be fed into the hands of the administrator, and it’s common practice for administrators to suspend the use of gift vouchers. The issue has been thrown into sharp relief in recent months because of the high number of collapses, starting with Comet last November and continuing with January’s spate of collapses as administrators Deloitte and PwC both stopped accepting vouchers for HMV and Jessops respectively.
Customers and creditors
Comet and HMV subsequently started accepting vouchers again, but as Charles Maunder, partner and head of the banking, restructuring and insolvency team at law firm Michelmores, says, administrators are actually required to stop accepting them at first.
“HMV and Comet, after an initial period, turned round and said they would start accepting them,” he says. “But they’re not obliged to do that.
The starting point, in fact, is that they are obliged not to prefer one group of creditors over another.” It’s easy for customers to feel convinced of the strength of their position - once a gift card is purchased, shoppers might justifiably feel they are entitled to spend them.
But this isn’t the case - gift card holders are just one in a long line of unsecured creditors, and they are no more entitled to receive what’s due to them than other creditors and smaller suppliers that get caught up in an administration.
“That gift card is effectively an unsecured claim against the company,” says Dartnaill. “Customers would rank in the same way as someone who had been cleaning the store, or the same as some employees.”
Maunder says there’s a small chance that customers might have a claim against the directors of a company if they continued to sell gift vouchers after it became clear to them that the business was heading into administration. But that would be difficult to prove and, because of the small amounts generally stored in gift cards, it’s unlikely to occur.
He observes there are other options for shoppers who purchased vouchers using their credit or debit card - Section 75 of the Consumer Credit Act states credit card purchases over £100 can be refunded by the card issuer, and the chargeback method can be used to do the same for debit card purchases.
But even in this instance, he points out, the consumer is relying on the good will of the card issuers and is not legally entitled to a refund. “It will come down to the terms and conditions of the card issuer,” Dartnaill says.
The only real recourse for consumers at the moment is to hope the administrator will decide to start accepting vouchers again, and this does often happen. Dartnaill says the administrator is likely to do that when it is keen
to protect the brand’s value. “The real reason for doing so is for goodwill purposes,” he says. “It means you preserve the brand or business, and it usually happens when the administrator wants to sell it on. The business is worth more if the brand has been protected.” This does, of course, require the administrator to make the decision that the brand is worth protecting.
With consumers effectively left at the mercy of administrators, is there anything retailers can do while times are good to protect the appeal of gift voucher schemes? There are certainly good reasons to keep voucher schemes up and running during insolvency - on average, Johnson says, shoppers spend 40% more than the value of their voucher, making them an important source of income.
There are also the PR benefits of being seen to carry on trading when administration hits, and the higher overall return that can be achieved for creditors if gift schemes continue.
Johnson says ring-fencing the money paid for gift vouchers is one option, for instance by putting it into a trust, although he admits that is not easy. Dartnaill agrees it’s probably more work than it’s worth. He says: “Putting the cash aside is a potential solution, but whether it’s workable is highly dubious. It’s very difficult to administer something like that.”
It’s difficult to say how much each retailer might have tied up in gift card schemes, Dartnaill says, but for businesses the size of HMV and Jessops it’s likely to be millions of pounds - a sizeable sum for a retailer that is likely to have been short of cash for a while. Convincing the business to set aside a portion of working capital won’t be an easy task.
Given the present legal situation surrounding gift vouchers, it seems buying them will be a risk that consumers have to take - unless the Government acts to change their status as creditors when administration hits.
Maunder says: “One thing that might come out of this is you could potentially see some legislation being brought in to protect these types of consumers.”
McGovern says some form of regulation is a move the gifting market would welcome. She says: “We believe that the time has come when all gift cards should be regulated to put any concerns way beyond the doubt of
the consumer and allow gift cards to be a thriving part of the future of retail in the UK.”
But while that could potentially happen, there is no suggestion at the moment of such an initiative from the Government. For the time being, retailers will need to manage their schemes as best they can. While HMV and its ilk have generated bad press, trust is the central issue for most shoppers. For those that can convince consumers their business is worth investing in, the gift card is far from dead.
Mobile gift schemes
Gift cards and vouchers have been around for years and have become a central part of most retailers’ offers.
But with the advent and growth of mobile technology, their use is likely to start changing as retailers and gift scheme providers start to get more creative.
Alex Vines, business development manager at pre-paid card provider PrePay Solutions, says mobile is
changing the gift voucher market in two main ways.
Firstly, shoppers are increasingly using mobile devices as their main means of getting information. “This ranges from a simple but essential thing like understanding the balance on a giftcard, to being able to have full account self-management services on something like a pre-paid MasterCard product,” he says.
Mobile apps and other mobile technology can give a customer more control over their gift card and may help shoppers avoid forgetting about them until after they have expired. The channel is likely to become more attractive to consumers as smartphone use continues to grow.
The second change is more long-term. Vines says customers will eventually want the full end-to-end gift experience to begin and end on a phone. He says: “Purchasing virtual gifting products on a mobile device is a great starter, but the redemption of these in a multichannel environment will also become a factor.”
This kind of service is still in its early days, but there is plenty of activity in the market, and it’s likely to keep moving forward.