Tesco’s £6 Million Gift Windfall

What do a gym membership, and a gift card have in common? Both of them are a thing that is bought and then often goes unused.

In a recent paper I was reviewing titled “Paying Not to Go to the Gym,” it was shown that people who buy an annual membership to a health club underuse that membership by an average 70%! So most of us would actually be better off buying a monthly or a daily pass.

In another recent report I found was about patients who continually fail to take their medicine. “People who are prescribed medications to be self administered” it began, “typically take less than 50% the actual prescribed doses.” While this may be more immediately troubling as a medical issue than financial, it is nevertheless true that the bathroom cabinets of the UK are filled with millions of pounds worth of unused prescription medicines.

Now lets turn to gift cards, there is a very good reason that they are widely known among retailers as a “stored-value product” that is they store their value very well indeed. It is known that of the £30 billion spent on gift cards in 2012, roughly £5.7 billion will never be redeemed which has a bigger financial impact than the combined total of both debit and credit card fraud. A recent survey found that only 27 percent of people use a gift card within a month of receiving it and further estimates that 19 percent of the people who received a gift card in 2012 will never used it.

Considering that one-third of all shoppers in 2012 planned to give someone a gift card, thats a lot. Perhaps you are among the minority, and you have already spent yours, or soon will. But the odds say that it is more likely to have wound up in your crap drawer in the kitchen (come on, we all have one!).

Does this mean that a gift card is a bad gift? Well the answer depends on who you ask, but I would like to ask a different question: What is the giving of a gift meant to accomplish in the first place?

I might describe a gift as a signal mechanism that allows me to tell another person that: a) I am thinking about them; b) I care about them or; c) I want to give them something that they’ll value.

Of course there are many different types of gift relationships. It’s quite easy to give gifts to people who don’t have the money to get things for themselves. Since a child can’t drive himself to the local toy shop and probably doesn’t have much money of their own, by giving them a toy in this way you are expanding the set of things they have access to. Which makes a meaningful gift.

With adults, it’s gets a bit more difficult. An adult is free to buy whatever they want, and presumably they know what they like. So ideally, you would want to give them something they might like but doesn’t know about, or some kind of guilty pleasure that they wouldn’t buy directly themselves. In either case, you are creating value for the recipient by giving them something that is actually worth more to them than the money you actually spent on the gift card.

But realistically, lets face facts, most of our gifts fall well short of those high standards. This in turn creates a lot of inefficiencies. In the 1990’s a leading economist called Joel Waldfogel addressed this subject in a paper whose fame in economics circles is due in part to its Scrooge like reference in the title: “The Deadweight Loss of Christmas.” Since gifts can be mismatched with the recipients’ preferences, it is likely that the gift will leave the recipient worse off than if they had made their own choice with an equal amount of money. He concluded that holiday gift-giving destroys between 10 percent and 30 percent of the value the gift.

So if giving a gift destroys so much of its value, why not take the most direct route and simply give them money? Well, some people do already. In the small survey of university students on which Waldfogel based his paper, grandparents gave money 40 percent of the time, and parents gave money less than 10 percent of the time. But not once did a student receive money from his or her partner, suggesting it is only appropriate in certain circumstances.

So if giving money is inappropriate, and buying gifts is not really efficient, wouldn’t a gift card be the perfect solution?

You could certainly make that case. Just think: In the weeks leading up to Christmas, millions of people visit your shop or website and hand you millions of pounds in exchange for in reality nothing more than a plastic I.O.U. card that may never even be used. Tesco, for example, earned £6 million last year in gift-card “breakage,” which is the retail industry’s term for card value that was bought but never used. Then there’s what the retail industry call “up-spending”: that is most consumers who do use their gift cards spend some of their own money to buy items that are more expensive than the face value of the gift card.

For the giver, a gift card could hardly be easier to deal with. But most good people would argue that if a gift card is so good for the giver, it is necessarily bad for the recipient. Now consider the fact that they can be bought really easily and that this signals to the recipient that the giver didn’t put that much effort into their gift.

In the end, the value of any gift is mostly dependent on the nature of the relationship between giver and recipient. So this Christmas, if you need a gift for a strict rationalist, consider money. If you want to appeal to someone’s wild self, you’ll have to use your imagination. And if you’re hoping to send a little something extra to the shareholders of Tesco or the Gap or M&S, consider a gift card.

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