3 Surprising Ways Gift Cards Drive Higher Margins for Restaurants
Gift cards are big business, and getting bigger.
Across all industries, businesses sold $124 billion in gift cards in 2014. Leading this charge are fast-casual and national full-service restaurant chains. Some have even gone so far as to market their gift cards in grocery stores, gas stations, and other outlets in order to increase their sales. Despite this growth, independent and local full-service restaurants often do not even offer gift cards at all, or do not aggressively market them.
The primary reason that independent and local restaurants haven’t embraced gift cards isn’t cost. Gift card programs, particularly those provided as an ancillary service by your credit card processor, can cost just a few hundred dollars to set up, and more than pay for themselves. Rather, restaurateurs’ reticence is based in large part on misunderstandings about the potential of gift cards to boost margins. In this article, we’ll highlight three surprising ways that gift cards can boost margins for full-service restaurants.
Gift Card Breakage
The dirty secret about gift cards is that approximately 30 percent of them never get redeemed. Although there hasn’t been an empirical study specific to full-service restaurants with just one or few locations, that 30 percent figure is likely even higher for these organizations, as the number of outlets to redeem the card are fewer. Aggregated across all industries, a study by CEB TowerGroup puts the value of unused gift cards at $41 billion since 2005.
For the 70 percent of gift cards that are actually redeemed, because the income is recognized at the moment of sale, they can be considered an interest-free loan. But for the 30 percent of cards that are never redeemed, the breakage can be immediately considered “found” margin, insofar as the restaurant provides virtually no service—nor bears any significant cost—in exchange for those funds.
Thinking about it another way, any food or drink purchased at your establishment via a gift card brings with it an additional 30 percent in margin over and above a client purchasing with cash or credit.
Of note, it’s important to recognize that some states have expanded escheatment laws, which essentially require businesses after some period of time (typically two to five years) to add the value of the unused card to the treasury’s general fund until it is claimed by the rightful owner. Most retailers and card issuers, particularly smaller organizations, have simply ignored this requirement to no consequence.
Gift Cards Drive Larger and Higher-Margin Purchases
Restaurateurs often have the mistaken sense that selling a gift card ends up capping the amount of spend that the customer will ultimately make. The reality, however, is that 72 percent of gift card shoppers spent more than the original value of the card when redeeming. And of those, 25 percent purchased an item they hadn’t planned on buying, 8 percent purchased a more expensive version of an item they already planned to buy, and 3 percent purchased an item from an establishment they otherwise wouldn’t frequent.
The increased spend that is generated simply by changing the medium through which a customer pays to a gift card, is responsible for somewhere between a 15 and 35 percent increase in overall ticket size. A 15 to 35 percent increase in average ticket size is a massive increase for most full-service restaurants and would easily change the outlook of a businesses’ annual finances. This makes a strong case that not only should restaurants be excited about the prospect of using gift cards for the free margin found via breakage, but also about the increased spend—particularly in higher-margin or luxury-type menu items—for those gift cards that are redeemed.
A Better Alternative For Disgruntled Customers
Every restaurant has, at times, disgruntled clientele. Most full-service restaurants seek to placate them by writing down a portion of their bill, providing free desserts, or in some instances, providing a refund.
These responses to a disgruntled customer, however, are expensive. Refunds cost the entire value of the item purchased, typically along with an additional transaction fee by your credit card processor, while bill write-down of the offending entree means missing out on immediate revenue. And even providing a free dessert has an underlying cost that must be immediately borne.
By contrast, dealing with a disgruntled client by providing a gift card has a number of benefits. The first is that the cost isn’t incurred until the gift card is redeemed. Add to that breakage which effectively reduces the cost of the gift card to the restaurant by 30 percent of its list value (discussed further below), the increased spending that typically accompanies gift card purchases, and the fact that it brings the customer who otherwise might not come back, back for another shot. Added up, these benefits of using gift cards as an alternative to cash refunds, writing down bills, or providing free desserts to disgruntled customers, can turn a negative situation into a long-term margin preserver and booster for the restaurant.
Adding together the free 30 percent margin attributable to breakage that is added to any gift card purchase, an additional margin attributable to larger ticket size, and the ability to minimize margin loss by replacing costly refunds or freebies with the less expensive alternative of a gift card, makes offering gift cards one of the easiest ways for full-service restaurants to boost margins.
In fact, once a restaurant can accurately appreciate and calculate the additional margin created by offering gift cards, the question won’t be whether they should offer them, but how they can increase the use of gift cards in their restaurant. Whether as part of a birthday mailer to encourage celebrating at their restaurant, bundled with a gift bag for a holiday sales push, or simply create an incentive for the customer to return after a less than stellar experience, gift cards should be an essential part of the business growth and margin growing strategy of full-service restaurants, large and small.
The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.