There may be more spending on gift cards this holiday season, and that could help boost retail sales next year, former Walmart US President and CEO Bill Simon told CNBC on Thursday.
Payment service Blackhawk Network found in a study that shoppers expected to spend an average of about $ 313 on gift cards around the holidays. That’s an increase of 19% from the 2019 average. In addition, 52% of respondents said they would likely buy more gift cards in 2020 than in the past.
In an interview on “Closing Bell”, Simon said the higher spending on gift cards could initially negatively impact retailers, who are already grappling with the disruption caused by the coronavirus pandemic.
“Gift cards are shaky … because you don’t recognize the sale when the customer buys the card. You recognize the sale when it’s actually redeemed,” he said. “So if you try to measure vacation sales, you will have this obligation on the balance sheet that is not a sale even though the sale has occurred.”
However, the impact of gift card purchases could be much more beneficial as we look ahead to next year, explains Simon, who served as president and CEO of Walmart US from 2010 to 2014.
One reason is that when recipients go shopping, they tend to spend more than the face value of the gift card. “In general, you will see about 20% to 30% more than the gift card,” he said.
The second reason is that there can be about “3% to 5% breakage, meaning cards are not exchanged,” said Simon. “It will be a bit of a windfall for the retailers, but that will also take a while.”
Variability could arise when retailers begin to see the benefit of gift card purchases next year, Simon said, noting the ongoing uncertainty surrounding Covid-19. But when asked if retailers could see stronger-than-normal sales in the first quarter, Simon replied that “they could and should.”
“If people are still hesitant to get out, they won’t be able to redeem their cards until the second quarter, and it could trickle in during the year,” said Simon. “But I think from what we’re seeing in the increase in gift card shopping, that seems likely.”