The Business of Gift Cards

Unknown · 00:00Jase: Welcome to another episode of The Numbers Game. I'm Jase. I'm here with Nick. How are you, mate?

Unknown · 00:05Nick: I'm good. Bit stiff, actually. Yeah, I need a massage, but cash flow's tight, mate, at the moment. So I just— I'm trying to find someone who might have a gift card they don't want.

Unknown · 00:14Jase: I have 3 Endota gift cards that have expired. Found them last night after a conversation with Case about—

Unknown · 00:20Nick: Oh, they've expired?

Unknown · 00:21Jase: Yeah.

Unknown · 00:22Nick: No good to me. No, I need one that's relevant.

Unknown · 00:24Jase: That's still There probably is one floating around even deeper down in the pile that might be usable. But Nick, I saw a post on Instagram. Jay Wright, who's the founder of Ecom Equation. We get a lot of clients through Ecom Equation, fantastic business.

Unknown · 00:39And Jay's got quite an interesting mindset when he unpacks businesses and it got my attention. I want to unpack it a little bit, but then turn it into why it's relevant to small business owners and also the general Australian population who apparently has a real problem with using gift cards.

Unknown · 00:55Do you have an example from your side that you might like to share about gift cards being used?

Unknown · 01:00Nick: Well, I've got a couple of examples, all in relation to, to me. Well, kind of. I, I bought my wife a gift card for Mother's Day recently for a place called Tokyo Head Spa, which is, from what I could see, a spa treatment relaxation that's focused on hair and scalp health.

Unknown · 01:23Thought I was genius. Did some research, found on Broadsheet. Excellent. How good am I going? Opens the voucher, opens the card, looks at the voucher. She said, oh, your sister gave me a voucher to that place for my birthday.

Unknown · 01:36Jase: I was like, oh, how was it?

Unknown · 01:38Nick: She goes, oh, I haven't used it. Birthday was a long time ago. It's like, okay, well, now you've got two. But then we also have, um, you know, a rack in our kitchen at least half a dozen dinner vouchers, movie vouchers that we've got for birthdays and stuff.

Unknown · 01:56But the reality is we just don't think to use them. We're not using them because we don't want— we want to use them, but you generally, with a child, as a lot of people know, you don't plan these nights out. They generally happen spontaneously and then you go wherever you go and most times you forget that you even had a voucher.

Unknown · 02:15Yeah. That's what happens.

Unknown · 02:17Jase: 100%. And Nick, you're not alone with that pile of gift cards. Ours is on the dresser as we walk into our bedroom. And I don't want to admit how big the stack is, but there's quite a stack. And some of them, you know, you get it and you go out and use a portion of it and you go, you know, I only bought the one thing that I like to do.

Unknown · 02:34Like, let's say a $100 Visa gift card, you know, and there's a value left on it. And then the years have gone by and there's different ones for— Dad loves buying a Westfield voucher. I didn't even know he was there. And he walks in with the brand new box of shoes. I'm like, yeah. So yeah, that's, that's exactly right. Somebody wants something and they've got the means to be able to get it.

Unknown · 02:50Hope you're listening, Dad. I'm still upset. Still haven't got over it, but my brother was talking the other day, he's like, oh, I can't wait to go and spend this voucher. But he lives near the Westfield. When Dad gets them for Case and I, the Westfield voucher goes on the shelf and we've got to plan a whole trip to go and use it.

Unknown · 03:05So the, the whole gift card concept is actually a bit of a gold mine if used correctly for business, but it can also be one of the biggest liabilities a business has. Now, just the straight-up headline for the broader gift card conversation.

Unknown · 03:25I will unpack a little bit of the Endota case study because it is quite interesting and there's probably a lot of people out there that have Endota gift cards that haven't used them. And I'm actually interested in if there is a bit of a run on Endota getting bookings and having to convert all these gift cards into actually delivering services.

Unknown · 03:41Nick: But there will be when we're finished.

Unknown · 03:43Jase: Yeah, 100%. Don't miss it. Follow Jay's Instagram following, The Numbers Game. We'll get this happening. In unused gift cards per annum in Australia, I don't know if you've seen all the notes, I'm going to let you guess if you haven't. How much do you think expires and goes to waste in— it's called breakage.

Unknown · 03:59So, in unused gift cards in Australia per year, how much do you think Australians leave on the table?

Unknown · 04:05Nick: Well, I'm going to have a stab. Are we— dollar amount?

Unknown · 04:09Jase: Dollar amount.

Unknown · 04:09Nick: $10 million.

Unknown · 04:11Jase: Cute. Do you want to go one more?

Unknown · 04:14Nick: 100 million.

Unknown · 04:15Jase: Up to $1.9 billion a year in unused gift cards. I don't know. I do need to check if the stats around the rest of the world— maybe Tommy can check off to the side during the show if the rest of the world is as bad as Australia in unused gift cards.

Unknown · 04:31But we have to be amongst the worst in actually going and using these gift cards. But Nick, you and I are two examples of just said we've got a stack of gift cards we haven't used.

Unknown · 04:41Nick: Yeah.

Unknown · 04:42Jase: When I sat with Casey last night and I was talking about the show, as we often do, of you know, how to approach the episode, anything relevant she wants to throw in. And she's like, holy shit, we genuinely have at least 3 Endota spa vouchers, you know, over the last couple of years that have been, you know, given to us that we just haven't carved out that time to go and do that thing, even though it would be really nice.

Unknown · 05:03But, you know, and they talk about, you know, the why these things end up breakage and not being used is because of, you know, especially mum who might get it for Mother's Day, then has to get either kids into childcare or something looked after. It's a couple of hours, got to carve it all out into a day, and it often gets pushed back or off to the side.

Unknown · 05:23Now, in the numbers for Endota, where this is really interesting, it's actually up for sale by Canterbury Partners at the moment. They're the private equity firm that own Endota. They've got 110 locations. $213 million is their network turnover for their arm of the business.

Unknown · 05:39And while some people would look at it and go, it's a spa business for sale, the breakdown actually becomes much more interesting when you look at the fact that $75 million or 40% of their revenue actually comes from gift card sales, which is an incredibly high percentage.

Unknown · 05:59On top of that, they are at the highest end of unredeemed breakage rate. So what that means is that almost 19% of the gift cards they sell are never redeemed. Now it's a bit lower.

Unknown · 06:14Nick: It's—

Unknown · 06:14Jase: it falls between 10% and 20%. So they're at the top end of the scale. Most other businesses that sell gift cards get breakage of about 10%. Still significant. So it is huge. Yeah, I mean, 10% is still really significant, but on the $75 million for Endota, it equates to about $13.5 million of pure cash profit per year that is just converting straight into revenue and straight to the bottom line because there's no service to deliver.

Unknown · 06:40Now, they also then park this money into a high-interest savings account and earn a couple of million of interest per year on this money before it converts. My accounting brain is showing it my head, but to explain to you as well. The reason that I thought this was interesting beyond the numbers being so kind of breathtaking for, I mean, the whole of Australia and this business is we often get clients that are referred to Future Advisory because their books are a bit of a mess.

Unknown · 07:07Their accountant or their bookkeeper may not have been paying attention to things properly and they come across to us and we have to do a bit of a tidy-up. Gift card liability is often one of the most wrongly reported and mishandled things that can happen through through the books of a business.

Unknown · 07:25So if you are running a salon, Nick, and you sell gift cards, those gift cards shouldn't go to revenue. You need to book them as a liability. So let's say you had a grand opening sale and you, you booked $10,000 worth of gift cards when you opened your salon.

Unknown · 07:41You do not recognize $10,000 worth of revenue. You do not hit the P&L at all. That is going onto your balance sheet as a liability for a future service you need to deliver.

Unknown · 07:51Nick: So it hits your bank account.

Unknown · 07:52Jase: Yep. Cash at bank. Okay. Debit cash at bank. Credit gift card liability. Roger.

Unknown · 07:58Nick: Yep. Yeah.

Unknown · 07:59Jase: Now that gift card liability, that initial $10,000, let's assume that 20% of that is never redeemed. So in 3 years' time, this is why it's so important to have really good records and good management of your gift card system. In 3 years' time, you're going to recognize 20% of that initial $10,000, as long as they weren't redeemed, you get to recognise that as revenue.

Unknown · 08:23If that remaining 20% is still sitting on your liability, it's 3 years later that you are recognising that as revenue and paying tax on that profit. But you've had that $10,000 or that initial $2,000 been in your bank for 3 years.

Unknown · 08:37Nick: So go back a step. Why wouldn't you have to recognise the whole lot?

Unknown · 08:43Jase: So the— because over the 3 years, I'm assuming 80% of them have been redeemed and already recognised. Oh, so, okay.

Unknown · 08:50Nick: Yeah, so I'm with you.

Unknown · 08:52Jase: All good. So that last $2,000 that wasn't redeemed has now hit the 3-year expiry because after November 2019, there's a 3-year mandated ACCC expiry on gift cards or like minimum 3 years. So it's up until 3 years, you can't write it off your balance sheet unless you've got reason to declare it as, you know, bad or doubtful.

Unknown · 09:14The 3 years in then is when you recognize the revenue. You've then got to pay the GST on it at that point in time. You've then got to pay company tax or whatever structure you're in tax on it at that time. Now that $2,000 number is a smaller example, but if you're a business that is doing tens of thousands or hundreds of thousands in gift card sales, loyalty points, prepaid cards, 10 packs for the jiu-jitsu or the massage or whatever you're doing, these are all things that need to be managed properly on the balance

Unknown · 09:44sheet of your business. Otherwise you can get caught out. Now what we see is when businesses come over that haven't set this up properly, they've overpaid GST because they've recognized the revenue too early. They've overpaid tax because again, they've recognized the revenue too early, but they've also under-declared the liability on the balance sheet, you know, so they've got a whole bunch of cash in the bank.

Unknown · 10:05It's been recognized through the P&L. And all of a sudden, though, as— because if you haven't recognized on the balance sheet and your customers start coming in and redeeming their gift cards, you're paying a team member their wages to do a job. Let's say it is delivering a service.

Unknown · 10:21All of a sudden you look at your month end and you're going, geez, revenue's down this month. That's, that's really strange. Profitability is low, or I'm in a loss. How did that happen? But because you haven't recognized the gift cards that were used that month, because it's just netting out as zero through your books if you recognize it too early, you've got a real numbers problem.

Unknown · 10:41And then that's where people hit cash flow issues because they're paying the wages and the rent, but the cash isn't coming in because you've been delivering gift card services that month.

Unknown · 10:50Nick: You know what really surprises me?

Unknown · 10:52Jase: Yes.

Unknown · 10:53Nick: Clearly, the ACCC is involved with the 3-year expiry now, but it's a wonder they're not doing more. Like, for the amount of money that companies take, and it's not their fault, it's the consumer's fault at the end of the day.

Unknown · 11:09Jase: Correct.

Unknown · 11:09Nick: For the amount of money that they take for not doing anything, it's a wonder it's even allowed to be a thing. And the other thing I'm thinking is for the incoming purchaser of Endota.

Unknown · 11:22Jase: Yep. Is that a risk?

Unknown · 11:24Nick: Like, are they— how are they treating that revenue? Because the reality is if something significant changes with the gift card system in this country, again, that's going to have a serious impact on their ability to generate that, not just the revenue, but the margins, considering they're getting that revenue for no output.

Unknown · 11:43Jase: Yeah. This is why it's very important for the buyer coming in to understand how that gift card liability works. Now, the buyer could look at that gift card liability and see, what are we saying, it's $75 million a year being sold annually.

Unknown · 11:59And then you imagine that accumulates over 3 years. So there's a lot of cash liability or there's a lot of liability sitting there. So let's just say 2 years' worth as the following one, you got $150 million in gift card liability. Now, for someone coming in to buy who didn't know the metrics of breakage and how much of that becomes profit, you may look at that $150 million and go, big risk.

Unknown · 12:19Like, that's a whole bunch of services with really low margins that we're going to have to deliver. But if you then understand the metrics, that actually is a whole bunch of cash that's becoming clean profit that goes straight to the bottom line. Um, you know, as, as long as obviously the numbers continue to trend in that direction.

Unknown · 12:38I mean, uh, hopefully maybe with some awareness, obviously the numbers game's got far reach, we might see a big uptick in Endota spa bookings.

Unknown · 12:46Nick: I'm just thinking you came up with an idea and I'd, you know, maybe if there's any listeners that could comment, but there should be a marketplace for this. Yeah. Actually, maybe you've got something.

Unknown · 12:57Jase: I'm glad you mentioned it. So as part of looking into this and, you know, hearing Casey say we had, you know, expired gift cards, knowing what I know now, if I then went to my gift card stack and went, you know, there's a, you know, Universal, there's a Village Cinemas, there's a couple of different things that I'm in the next month or two I have no interest in using or just don't have the time.

Unknown · 13:19But maybe that cash could be useful. I could buy some ETFs, you know, pay a tax bill, whatever I need to do.

Unknown · 13:27Nick: Pokémon cards.

Unknown · 13:28Jase: So Pokémon cards. Yes, yes. Watch this space. There could be some Pokémon card discussions coming your way. I did look into it to go So what— you know, The Numbers Game, we're about kind of giving advice to people and, you know, trying to get them to make better decisions. Now, if you're not going to go out and use those gift cards, then think about turning them into cash or Pokémon.

Unknown · 13:48There is GiftSwap Australia, there is BuySellVouchers, there is SellMyGiftCard.com, and there's Gift Card Granny. Now, there's a few other things. You can even go Facebook Marketplace and Gumtree. The recommendation is to find one with an escrow and a verification platform so it avoids Like anything, if it becomes too hard, the human nature is we just won't do it anyway.

Unknown · 14:12Maybe I should just go to Village and use the Gold Class voucher and just have a nice night in with our case. But if you do have a stack of gift cards there, if you are part of the $1.9 billion gift card opportunity per year in Australia, consider selling them and moving them on, generally getting anywhere from 60% to 90% of the face value of the card.

Unknown · 14:33So if you do want to turn that into cash and you skyrocket, that is definitely something to look into. Gen Z is the worst offender. So 37% have reported losing money on expired or unused gift cards. I then look at— there's a business that we, Future Advisory, was involved in many years ago, great mates of us, called Gifter Gift Cards, G-I-F-T-A.

Unknown · 14:58Their model was around trying to be an ethically responsible gift card business. They wanted to go out of their way to make make sure you use your gift card. So think digital wallet, text message reminders, converting gift card from one thing to another on their platform.

Unknown · 15:13And we got behind it going, this is a great business. Knowing the sheer numbers and stats behind the opportunity and the waste in gift cards, if a business came out and said, buy your gift cards from us, we will make sure that your present gets used.

Unknown · 15:30You send someone a $100 Gifta Gift Card, they can then choose to then switch that for a Rebel Sport gift card because they're going there that day. If they then don't use it, the reminder that pops up on the app or the text message they get to say, hey, you know, you haven't used this yet, we've got an opportunity.

Unknown · 15:47Woolworths is doing 10% off Woolworths gift cards. So all of a sudden, with the technology we have these days, I truly believe, like what you said, that, you know, it doesn't seem right that these gift cards should be expiring. There should be a better way. So not only the opportunity to sell them, swap them, but if you are going to buy a gift card, considering doing it through something that makes it easy to use, easy to swap, or choose something that you want yourself.

Unknown · 16:12But at the same time, still doesn't guarantee it. We, we use Gifter to buy employee rewards. There's an employee reward thing on there as well. So we'll send birthday gift cards to our team, and it's up to them to turn that into whatever they want.

Unknown · 16:27And I'll ask Bec to go and see the stats behind, because we've got the employer login And often a year on, we're about to send the next gift card and the first one's still sitting there, not redeemed. Now then I sit there going, at least I know the numbers. I can then actively encourage and say, you know, if you're not going to use the gift card, you can at least buy a round of beers for the office fridge and, you know, keep it going that way.

Unknown · 16:50Nick: So just on that. So this particular business, you buy a gift card from this business, which then you've got access to numerous— okay. I thought, you know what I thought you were going to say when you were talking about ethical was possibly they're a business that you can donate your gift card to people that are less fortunate.

Unknown · 17:10Jase: I will have to look into that and see if that is something they offer as well. And if it's not, I think that could be the next layer of ethical. And, you know, think about it, you know, you and I could go through our stack tonight and might have, you know, a couple hundred bucks we can donate somewhere if we're not going to use it.

Unknown · 17:24Nick: Or we could go together and get a head massage.

Unknown · 17:27Jase: Correct.

Unknown · 17:27Nick: Because I've got two vouchers.

Unknown · 17:29Jase: We definitely could do that.

Unknown · 17:29Nick: But probably not going to be used.

Unknown · 17:31Jase: No, no, 100%.

Unknown · 17:32Nick: That'd be nice, nice, nice though.

Unknown · 17:34Jase: 100%. Casey's probably sitting there going, she's always, Jase would actually just book me in for it and, you know, take me out for a day spa treat. But, uh, you know, we'll see what happens. The, um, the other thing that I touched on, and I went into a bit of a ramble in the accounting way that I do If you are a business that sells gift cards and you haven't thought about what this does to your numbers, what this does to your books, and what this does to your cash flow, this is definitely your opportunity to go and review your books, review your

Unknown · 18:04accounting system setup. If you're using software that is feeding into Xero or whatever accounting platform you use, you do need to make sure these things are set up correctly. Otherwise, it could be costing you thousands, tens of thousands in either overpaid taxes, misunderstood GST payments.

Unknown · 18:22And, you know, unravelling that can have pretty detrimental effects. And then also an ATO audit, you know, it's the last thing you need while you're trying to run a business with slim margins, which is a, you know, a service business where you're delivering goods, products, and services. But we see it, we see it all too often.

Unknown · 18:39And it's not just a service business too. I mean, think about, you know, a goods business where you're selling, you know, jewellery online, clothing, gift cards, are often a great way to send someone an easy gift to let them choose themselves. But knowing what we know about how much of them don't get redeemed, I think rethinking gift cards and rethinking how to make sure they are effective and well used is something that, especially here in Australia, we need to think more about.

Unknown · 19:06Nick: Yeah, I think just understanding that there are options available like, you know, this BuySellVouchers, GiftSwap Australia. I never even thought about that, but I'm definitely going to go home and go through the pile that we've got and say, well, can I transfer some of these to something that I know I'm going to use?

Unknown · 19:23Jase: Yeah. I think—

Unknown · 19:24Nick: A lot to be said for a $100 note.

Unknown · 19:27Jase: Yeah. No, that's it. I think the idea of making it easy too. When I get emailed a gift card that sits in my inbox, you know, it gets lost. When I get a physical card and it goes on a shelf, it gets lost. But when it's in my digital wallet, they're the ones that I regularly use.

Unknown · 19:43We, Case and I, get a kind of a weekly Woolworths voucher through through our health— AIA Health membership. And because I'm at the checkout at Woolworths and it's become a habit and a routine, I'll download the Woolies voucher and tap it at Woolies and check it out. So, you know, if you are in business and you want to be ethical and smart about it and actively encourage the spend of this, then of course, making it simple and easy for your customers to do that.

Unknown · 20:07To be honest though, it seems like in Dota— I'm not saying it's not ethical, but if you read some of the comments about how hard it is to sometimes redeem these gift cards, if you do book book in and then look to change appointment. There's a lot of T's and C's.

Unknown · 20:23And just in some of the comments alone, I'm talking about, you know, my mum booked in for an endodontic treatment but had to go to hospital. They said tough luck, they can't reschedule. Um, so, you know, there's— I mean, and like anything, when you read comments on Instagram and online, like, people go pretty crazy.

Unknown · 20:39And one, one business owner reported that they run a workshop business where gift cards are redeemed at 48%, which, which is wild that, you know, if we're looking at, um, sorry, the gift cards were redeemed as in breakage. 48% of gift cards sold for these workshops were never redeemed.

Unknown · 20:57You know, you think about just that free cash that particular businesses are getting when, when a gift card isn't redeemed. I actually sat there last night going, what could Innovate or Future Advisory do to sell gift cards? Like, is there something that we can do to— we Another way to do it.

Unknown · 21:12Nick: But yeah, well, yeah, you could just give people the option to, you know, buy a free, a free review with Jason Robinson, give them a 10% discount and half of them won't turn up.

Unknown · 21:23Jase: Yeah. And now I seem to— I think about the businesses out there, think about the businesses out there that do gift cards for their like employee of the month. So, you know, fringe benefits tax, anything over $300 attracts fringe benefits tax. You get a $200 gift card as your employee of the month gift.

Unknown · 21:42You know, you think as a business you're doing something really good for your team, but if 1 in 4 of those employee of the months goes home on a shelf and doesn't get redeemed, is your gifting strategy at work working, or in your business working?

Unknown · 21:55Nick: Yeah.

Unknown · 21:56Jase: And not just in work, but is your gifting strategy of what you buy for your friends and family, is it working if 1 in 4 aren't redeemed? Something to ponder.

Unknown · 22:04Nick: Another thing to ponder. What if we just scrapped the whole gifting thing?

Unknown · 22:08Jase: Is that better? Does that bother us at all?

Unknown · 22:10Nick: Yeah. You think about— this is— I'm going off topic here, but—

Unknown · 22:15Jase: I like it.

Unknown · 22:15Nick: You think about how hard it is to find a gift for people these days because of the prosperity that we've got.

Unknown · 22:20Jase: Yeah.

Unknown · 22:21Nick: In most cases, most people, if they want something, they buy it. It's very difficult to find a thoughtful gift for people these days that you know is actually going to be used.

Unknown · 22:32Jase: Yeah.

Unknown · 22:32Nick: Or that, you know, they're actually going, oh, that's great. I could never have got that. Well, you know, like it's— Yeah, I don't know about you, but I do my head in when I go to buy gifts.

Unknown · 22:40Jase: Yeah, it's Greg's 40th birthday coming up and we had this exact conversation. There was a particular new shoe model coming out.

Unknown · 22:46Nick: Yeah.

Unknown · 22:46Jase: And the day it came out, he randomly rocks up to Cremorne. I didn't even know he was there. And he walks in with the brand new box of shoes. I'm like, yeah. So yeah, that's, that's exactly right. Somebody wants something and they've got the means to be able to get it.

Unknown · 22:59Nick: In most cases.

Unknown · 23:00Jase: Yeah.

Unknown · 23:01Nick: Anyway, great info, mate. And in closing, my key takeaway here is the most profitable massage is the one that no one shows up for. Game over.

Unknown · 23:13Jase: This podcast is for educational and informational purposes only. The conversations are of a general nature and do not qualify as financial or tax advice. We recommend before you make any financial decisions, you consult a licensed professional. Individuals on the podcast may hold positions in the companies discussed. ---