Technology: Card Carriers
Gold Star Chili switches to gift cards from gift certificates, with little trauma.
By Lisa Bertagnoli, Contributing Editor -- Chain Leader, 4/1/2007
|
|
Gift cards are the trend of the present as well as the wave of the future. This past holiday season, gift-card spending totaled $27.8 billion, with the average customer spending $164.81 on gift cards, according to a survey by the National Retail Federation.
The gift-card craze extends to restaurants, too. Last year 57 percent of consumers gave or received a restaurant gift card, and the average total value of those cards was $80. That’s up from 54 percent and $65 in 2005. This year, 92 percent of consumers say they plan to buy more or the same number of restaurant gift cards as they did in 2006, according to research by Technomic Inc., a Chicago-based research firm.
Anticipating those numbers, in November 2005, Gold Star Chili switched from paper gift certificates to electronic, reloadable gift cards with denominations from $5 to $50. “They’re like credit cards,” explains Mike Mason, director of operations for the Cincinnati-based, 105-unit company. Gold Star began accepting credit cards about six years ago: “We had to do it to stay competitive,” Mason says.
Gold Star was also looking to discontinue its paper gift-certificate program, Mason adds. Paper certificates are more prone to fraud, thanks to advances in paper-copying technology. Even more important, customers were demanding electronic cards. “People are not tolerating paper as much as they used to,” Mason says.
A Technological Challenge
Gold Star called on its bank, Cincinnati-based Fifth Third Bank, to set up the gift-card program. Fifth Third and other banks such as Chase and Bank of America handle gift-card programs, as do independent companies, for instance, Brentwood, Tenn.-based Comdata.
Gold Star and Fifth Third faced several challenges in setting up the program, Mason says. First, the restaurants, 90 percent of which are franchised, do not use a PC-based register system, meaning the registers at the different locations are not linked to each other. For that reason, Gold Star had to choose technology that would reconcile gift-card purchases and redemptions in a way that was fair to franchisees. Another challenge was dealing with the paper gift certificates still in circulation.
A final issue was “breakage,” which is the money left when a gift card is purchased, but never redeemed. Breakage isn’t small change. TowerGroup, the Needham, Mass.-based financial-services research firm, estimates that approximately $8 billion of the $80 billion spent on gift cards last year will never be redeemed. In addition to their convenience and marketability, breakage is one reason retailers love gift cards. “It’s free money that’s never redeemed,” says Mason.
The $400 Solution
Fifth Third Bank solved the technology issue by outfitting each restaurant with a credit-card processor. The processors, which connect to the register with a phone line, cost about $400 per store; outfitting each store with a new PC system would have cost around $20,000, Mason says.
The bank addressed reconciliation and breakage by setting up a central gift-card account. When a customer buys a gift card, the payment goes into the cash register. At the end of the day, Fifth Third deducts the amount of that purchase from the location’s register and deposits it into a central holding account.
When the customer redeems the card at another location, that location is credited the amount of the gift-card redemption out of that same gift-card “kitty.”
Fifth Third charges a transaction fee for handling the gift cards and for other services, such as when a franchisee calls to check a balance. Mason points out that Fifth Third, not Gold Star Chili, controls the account.
The setup is typical for franchised systems, according to Patrick Moran, vice president of portfolio and product management at Fifth Third Bank. He adds that it’s crucial for a gift-card program to be rolled out smoothly. “People expect it to work perfectly,” Moran says.
As for paper certificates, Gold Star stopped selling them in July 2005 to prepare for the transition and destroyed all unsold certificates. The chain gave customers 18 months to redeem the paper certificates, encouraging them to do so via in-store marketing materials.
To prevent gift-card fraud, Fifth Third installed triggers that, for instance, alert the system if a card is reloaded more than a certain number of times over a short period. “So far, that’s happened once,” Mason says. The chain will cancel the balance on a suspect card, he adds.
Feeding the Ad Monster
At Gold Star, gift cards account for about 5 percent of sales, and Mason says the chain enjoys an 80 percent redemption rate. “People use [the gift cards] like cash,” he says.
Gold Star has decided to funnel any breakage into the chain’s advertising association, which is handled by franchisees. “That’s something we felt we had to do from an ethical standpoint,” Mason says.
Marc Rulli, a franchisee with four Gold Star restaurants in Kentucky and Indiana, agrees. “We look at it as a partnership, and it’s the right decision to make,” says Rulli, who serves on the franchise advisory council board. “We understand that feeding the advertising monster helps us long term.”
Rulli, a franchisee since 1999, was happy to see Gold Star launch a gift-card program. “We’re doing significantly greater gift-card sales than with paper,” Rulli says, though he says he isn’t sure of the exact figure. He adds that the rollout, from a technological standpoint, went smoothly, and the learning curve for staff was slight.
Gift cards make sense from a marketing point of view, too. “The industry is moving in that direction,” Rulli says, noting that Gold Star began offering gift cards a year before QSR giants such as McDonald’s and Wendy’s did. “I would say we saw the future and took advantage of it.”
View All Blogs
