Sharpening Gift-Card Etiquette

There needs to be a book on gift-card etiquette. Not from a consumer perspective of how to gracefully give or receive gift cards, but from the merchant perspective of how a business should honor gift-card redemptions.

Ironically, chapter one in the book should be titled “Chapter 11: What to do about outstanding gift cards.”

In recent weeks, Sharper Image unfortunately painted a classic “What not to do” picture for the industry. After Sharper Image filed for bankruptcy on Feb. 19, the San Francisco-based company said it would not accept outstanding gift cards, gift certificates, merchandise certificates and rewards cards at any of its stores, on its Web site or for catalog orders. A veritable uproar ensued across Internet chat rooms and many speculated that the once-popular retailer had committed public-relations suicide.

On March 7, Sharper Image released a statement that it would, “Immediately resume redemption of all its customers’ gift cards, reward cards, gift certificates and merchandise certificates for their full value after Bankruptcy Court approval.”

There are two fairly significant stipulations to the reinstatement policy: The cards or certificates must be redeemed in full in one transaction, and customers must spend at least double the value of the gift card or certificate in the transaction.

However, the most telling aspect of Sharper Image’s March 7 statement are the final words—“after Bankruptcy Court approval”—which elucidate a fact that bloggers, consumers and even retail executives fail to grasp. When a retailer files for Chapter 11, the decision to allow that retailer to accept or not accept outstanding gift cards is made by the Bankruptcy Court, not the retailer.

In the company’s prepared statement, Sharper Image CEO Robert Conway stated, “We are extremely gratified that our company will now be able to honor the full value of all pre-Chapter 11 gift cards, reward cards and merchandise certificates. I sincerely hope the vast majority of customers will feel this is a fair resolution to the difficult problem and we look forward to serving our customers well today and for many years to come.”

Because Sharper Image aspires to recover from bankruptcy and continue the success of its retail operations, it was particularly important to address the gift-card problem and offer its customers a positive resolution.

However, the circumstances of bankruptcy differ with each retailer. For instance, The Bombay Co., Fort Worth, Texas, filed for bankruptcy in September 2007 and the following month announced all of its U.S. stores would close. Gift cards could not be used during the retailer’s liquidation sales. (See sidebar.)

The argument that gift cards should be honored despite a bankruptcy filing has considerably more weight when the retailer expects to remain i n business. When Movie Gallery filed for Chapter 11 relief on Oct. 16, 2007, the company took a proactive stance. In its prepared statement announcing the bankruptcy filing, Movie Gallery stated, “The company has also asked for court permission to continue to honor its current customer policies regarding merchandise returns and outstanding gift cards and customer-loyalty programs so that the Chapter 11 process will not impact the Company’s customers.”

Movie Gallery, based in Dothan, Ala., operates under the brands Movie Gallery, Hollywood Video and Game Crazy. Although it has closed several hundred stores in recent months, the video retailer has approximately 3,890 stores located in all 50 U.S. states and Canada.

Meaghan A. Repko, a director with New York City-based Joele Frank, Wilkinson Brimmer Katcher, which provides strategic, financial and corporate communications counsel, told Chain Store Age that Movie Gallery was granted permission by the court to honor its customer policies throughout the company’s bankruptcy filing and current restructuring.

Additionally, Movie Gallery has continued to sell gift cards in its stores and, although she could not offer specific sales volumes, Repko acknowledged gift-card sales have remained popular and, on an individual-store basis, on par with previous holiday seasons.

Gift cards have clearly become a staple in retail merchandising and marketing strategies, but the unique circumstances of a gift-card transaction necessitate a greater attention to detail and an extended relationship between the retailer and its consumers.

The Incentive Gift Card Council (IGCC) is a strategic industry group within the Incentive Marketing Association, Naperville, Ill., that provides educational services. Partly in response to the Sharper Image gift-card debacle, the IGCC posted a position statement on its Web site that acknowledged the growing number of bankruptcy filings and encouraged businesses to exercise due diligence. Additionally, the IGCC stated:

• Even if a bankrupt retailer would like to honor gift cards, they may not be allowed to per a court order.

• If the bankrupt retailer is acquired by another company, the buyer is not legally required to honor the gift cards.

• Gift cards fall in the class of unsecured creditors, which are usually the last to be paid in a bankruptcy situation.