Hopping can be hard, time-consuming work, which is why, as December approaches, more consumers may be relying on gift cards. In fact, 75.5 percent of consumers surveyed expected to buy at least one gift card for the holidays last year, according to a National Retail Federation study of 7,128 consumers. The average consumer was planning to spend $88 on gift cards in the 2005 holiday season, 15.6 percent of the average holiday gift budget.
But the popularity of gift cards has forced some interesting bookkeeping changes in the toy industry: December sales move into January, because with gift cards, the sale is not counted until the card is redeemed, even though the retailer has the increased working capital when purchased.
"Kids use gift cards by January's end, and so the sale is posted in January," explains Reyne Rice, toy trend specialist for the Toy Industry Association (TIA). In fact, 84 percent of kids six to 11 years old like receiving gift cards, "Under six, kids like the physical toy and opening boxes," she adds. And according to a 2006-2007 report from consulting firm Funosophy, 80 percent spend their gift cards by January. This means that for toys--which traditionally register 30 percent of sales in December--that number has slipped to 25 percent due to the gift card effect.
Retailers and manufacturers can plan for what is predictable--for example, Christmas is coming! "Retailers hire extra sales force and make sure they have enough goods to sell," points out Jeff Miron, an economist and visiting professor at Harvard Business School. But even this may change. "Gift cards may affect how long retailers keep holiday help on," ventures Ken Troske, professor of economics at the University of Kentucky. "Maybe instead of the huge spike-up in December, this will lessen out a bit, and stores will hire fewer people but keep them on longer."
This may also change how the Bureau of Labor Statistics reports its seasonally adjusted employment figures. Notes BLS statistician Ed Robison, "As seasonality changes, our mathematical models will be adjusted for this."
Economists don't like uncertainty and neither do accountants nor the Securities and Exchange Commission. Says Joel Waldfogel, an economist at The Wharton School, "Since gift cards have become more prevalent, from an accounting point of view the store doesn't recognize revenue until the card is redeemed; so it's a liability until then."
While eager kids may redeem those gift cards quickly, adults might wait months or even forget about them entirely. How retailers deal with this is under scrutiny: What do firms do to recognize revenue for unused gift cards? When Best Buy took a four-cents-a-share benefit by doing just that--recognizing the revenue from unused gift cards--the SEC noticed. The company's timing met with some skepticism from investors, too, who wondered whether the company was trying to manage earnings. This will only become murkier as state rulings get involved, and gift cards become more popular.
Computer sales are seasonal, too. The delay of Microsoft's new Vista operating system to January means a loss of crucial holiday sales. Many buyers will delay purchasing new computers in order to get the latest version of Windows. That stimulates a ripple effect, because companies with money at the end of the year are encouraged to use profits to grow their businesses. "They spend on equipment and can depreciate it--so this time of year is not just for gifts but for saving taxes," says Neil Hennessy, president and portfolio manager of Hennessy Advisors. Electronics retailers, which cater to small-to-mid-size firms, look to the fourth quarter for these windfalls that now may not occur while companies hold out for the new operating system.
You'd think the one thing that remains a certainty is the holiday season itself. Yet with Thanksgiving changing dates every year, even the number of days between it and Christmas varies from a low of 26 to a high of 32. "It's a seven-year cycle," notes economist Troske, "throwing in leap years."
Do consumers spend more when there are more days to shop? Emek Basker, assistant professor of economics at the University of Missouri, discovered that total per-capita retail sales increase by $6.50 with every additional shopping day between Thanksgiving and Christmas. The implied difference is $39 per capita or 20 percent in holiday spending in a given year.
So it seems that people still like to make a big splash at holiday time. Concludes Rice, "Even with reports that the economy is slowing, parents still want to buy presents for kids. They will forego winter coats, but they won't forego that look in kids' eyes. There are only a certain number of years that they'll have that."
Janice Fioravante wrote about outsourcing in the July issue.