Sunday, June 5, 2016

We often talk around here about how precise Calcbench data can be, so today we’re going to give an example by looking at something pretty obscure: disclosures related to unspent gift cards. Plus we really want to know just how much money we’re leaving on the table when we lose those Starbucks gift cards.

The economics of the unspent gift card are easy to understand: someone gives you a gift card worth, say, $25, and you only spend $23.71—and then lose the gift card and forget all about that remaining $1.29. Extrapolate that tiny example to the global retail industry, and suddenly you’re talking about real money.

How much money? Retail businesses reported a total of $305.3 million in “breakage” revenue for 2015—that is, unspent money remaining on gift cards, that the issuer decides never will be spent, and therefore recognizes the funds as revenue. (Usually the card is deemed “broken” when it reaches an expiration date included on the gift card, although consumer groups have sparred with various retailers from time to time that gift cards should include no expiration date.)

The breakdown for breakage revenue in the retail industry looks like this:

Cos. Reporting Total Revenue Avg. Per Company
2015 59 305.3 mill 5.174 mill
2014 62 271.8 mill 4.383 mill
2013 72 295.7 mill 4.106 mill
2012 71 259.3 mill 3.651 mill
2011 69 230.5 mill 3.340 mill

Breakage only addresses money left unspent on gift cards permanently. Retailers still have to disclose money left unspent on gift cards temporarily, until you actually do make a purchase with that gift card the boss gave you last month. This is where reporting gets a bit tricky.

Technically, revenue cannot be recognized for the sale of a gift card until the seller (Starbucks or Old Navy or whomever) transfers merchandise to the buyer—but that doesn’t happen at any specific time with a gift card. So when you buy a gift card, the retailer can only record a deferred revenue liability on the balance sheet until you actually buy that cup of coffee or pair of jeans months later (or until the card expires and that money shifts to breakage revenue).

The money you’ll eventually spend on that gift card is much larger than the spare change you’ll never spend, so accrued liabilities for unredeemed cards are understandably much larger.

Cos. Reporting Total Liabilities Avg. Per Company
2015 82 8.09 bill 98.7 mill
2014 96 8.11 bill 84.5 mill
2013 104 7.06 bill 67.9 mill
2012 95 6.01 bill 63.3 mill
2011 87 5.32 bill 61.2 mill

Something to think about next time you scrounge for change to buy another latte, because you let that coffee shop gift card expire.

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