Consumers fell in love with electronic strip gift cards this holiday season. Sales rose an estimated 18 percent to $43.5 billion for the entire year. The affair is more than just a passing fancy. In fact, expect gift cards to gain momentum throughout 2004 and morph into stored-value cards, as consumers buy them for themselves rather than just as gifts. And that means more year-round revenue for retailers.

Retailers are making it worthwhile, offering discounts — such as a $50 card for $40 — and other special incentives to pre-pay. Such deals pay off in the long run for the retailer because they not only create traffic, but lead to bigger tickets. Many consumers spend more than the face value of their cards.

Starbucks' gift card already doubles as a stored-value card that can be replenished regularly and the chain has found more and more customers coming back with cards in hand, preferring to pre-pay and avoid a scramble for cash for their morning lattés. Starbucks reports that 10 percent of all transactions involve a stored-value card.

Several convenience store chains have also found success with stored-value cards that customers can replenish on a regular basis, says Tara Weiner, national managing partner of Deloitte's consumer business practice, which conducted a survey of 3,658 shoppers concerning their holiday shopping habits. “This holiday season, the gift card purchasing phenomenon was a matter of choice,” she says. “But convenience was also a big factor, and it will continue to gain in importance for consumers.” One in 10 shoppers bought a pre-paid gift card for their own use in 2003, she adds.

At Best Buy, management reports double-digit growth in gift card sales from a year earlier. More than half of the cards purchased were redeemed by December's end. Wal-Mart reported a 20 percent jump in gift card sales, with a large percentage of those balances being spent in the last week of December. As of Jan. 5, only 50 percent of gift card recipients had redeemed some or all of the dollar amounts on their cards, Weiner says. Since retailers don't post the gift cards as revenue until they're cashed in, a significant amount of holiday sales were pushed into January and even into February.

Holiday Hit

So why the big jump in gift card sales? A lack of interesting merchandise prompted shoppers to give up trying to find a unique gift and buy a gift card instead, says consultant Marshal Cohen of NPD Group. The ability to customize the cards, for example putting $80 on one and $50 on another, also appealed to shoppers. An even bigger factor is the increasing number of mid-tier retailers adopting gift cards instead of paper gift certificates, says Bill Farris, strategic product manager for Paymentech, a Dallas-based processor of payment transactions whose FlexCache system is used by retailers. Top-tier retailers, who adopted gift cards one or two years ago, are now more comfortable with the system and are marketing the cards aggressively, he adds.

Unlike paper certificates, gift cards aren't active until they're sold, allowing retailers to display cards throughout their stores and at cash registers to trigger impulse buys, Farris says. At Home Depot, shoppers received juicy discounts on gift cards, such as a $100 gift card priced at only $80. Bloomingdale's offered five specially-designed cards featuring popular musicians such as crooner Harry Connick Jr. Target sold cards in tri-packs and Hot Topic's gift cards featured 11 themes from Hello Kitty to Homer Simpson.

One roadblock to the popularity of stored-value cards was that some retailers deducted fees from the value of the card if it wasn't used by a certain time. Many retailers recently eliminated these fees as an act of goodwill. Starbucks, for example, removed all mention of a $2 non-usage fee from its cards after receiving complaints. State governments are also stepping in, with California and Massachusetts passing legislation prohibiting expiration dates and non-usage fees.