266 comments on DrumBeat: December 26, 2007
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266 comments on DrumBeat: December 26, 2007
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It's above $96.
Gold has also experienced a sharp price jump. As I write this, it's at $824.60/ounce.
Lately I've been listening to right-wing nutcase radio. One of the positive spins they've been touting over the Christmas holiday is that retail sales are poised to get a major boost in January because many people gave gift cards rather than presents this year. I see it differently. Big chain stores like Wal-Mart and Target sell prepaid gift cards. However, there is no guarantee that recipients of these cards will use them to purchase luxury items like color TVs, stereos and jewelry. Rather, they may simply redeem them for food, something they would have to buy anyway. If that happens, the stores may actually have a dismal January, since the gift cards will eat into their cash sales of food, toilet paper and other necessities.
Ozonehole, nice observation. I got a gift card from my employer last year for Buffalo Wild Wings. I still haven't used it because after walking into the place I would wind up spending more that the gift card. A Wal Mart card would have been nice.
Doesn't it follow that the sale is rung up when the gift card is sold?
January will just transfer the goods without ringing up a new sale.
Apparently not the way it works. A liability is recorded on the retailer's books when the card is sold and the cash taken in is the corresponding asset.
The sale takes place when the card is used and the liability created when the card was sold is reduced by the amount os the sale. Expired cards are taken into income. Whether expirations become a sale is not clear to me [I don't think so -- this is probably an "other income and expense" item ].
Gift cards are used as a tender at the time of sale, just like cash, check, or credit card. So sales of product using gift cards will show up mostly in January.
Here's a news article touting the big spending increase expected due to gift cards:
Ya...saw that article. Another thing about gift cards that's becoming more commonplace is expiration dates and limitations on their use.
Yes, I have personally been the recipient of some of those "gift" cards. There were so many conditions of redemption ( expiration dates, and what store it could be used at, and I didn't get any change back ) that the card went unused.
By the time the store had something I wanted, I found my "gift" card was no longer valid and they were going to charge me an "activation fee" right at what the card itself was valued at.
My "benefactor" credited the merchant on my behalf. Geez, I am supposed to be thankful? Well, its the thought that counts, but I sure would have rather had either the cash or spent the money on a shared enjoyment.
I view "gift" cards as yet another construction of the retail industry to relieve people of the frustration of selecting a gift, so they provide something that looks valuable to the gift giver. Its another one of those "think outside of the box" boardroom brainstorms that enrich the merchant by getting those dollars from the gift giver's wallet and into the cash register before some one else does, while burdening the giftee with the responsibility of meeting the conditions of doing business.
No one sells dog food to the dog. He eats what he gets.
Steve
Yeah, I really don't understand why gift cards are so popular. I guess it's the general American feeling that giving cash is tacky. A gift card can at least signal that you know the person and gave it some thought. (I considered giving my sister a Home Depot gift card as a housewarming gift when she bought her house...until sanity returned.)
But now there are bank gift cards (which are the worst of all). If you're going to give someone a bank gift card, why not just give cash?
I really don't get it. Why not do like they do in Asia, and give cash, wrapped in red paper or in a pretty red envelope?
I guess this is something that separates engineering types from marketers. Businessmen maximize profit, engineers maximize utility.
That little episode in my life, where I lost my cool in public trying to explain how I thought it was so absurd that the business was penalizing me with such fees - for my failure to redeem my gift card in a timely manner as per their requirements - brought to a head my hatred for how profit-centered and greedy the Christmas season has become for business.
Some little twerp thought this whole scheme up and some executive businessman, looking beyond millions of screwed giftees like myself, actually paid a salary for that kind of thinking. Its amazing the things executives will pay for when they are making far far far more than what they are worth.
Believe me, that little episode cost me far more than the $25 the damned card was worth - in pure hatred for the business institutions that foster such foolishness.
Forgive me for ranting like a madman on TOD, but just recalling the whole sordid affair gives me another irrestible urge to vent venom.
Steve
Another "benefit" of gift cards has occurred to me: you can pay for them with credit cards. While you can get a cash advance with a credit card, there are fees, and also some cards have very strict cash advance limits. So gift cards may be preferable, to those who are spending beyond their means.
Very very good point Leanan!
Really, I've been wondering for quite a while why we americans don't just give cash in a little red envelope like the Chinese do. Hallmark etc could even come up with a new line of little envelopes to put cash gifts in....
But of course your mental laser beam cuts right down to the truth.... many Americans are not using cash. They flat-out don't have the cash to put into the little envelopes. Their paycheck is deposited electronically, CC bills paid that way, some of it gets transferred over to their last HELOC, and the HELOC grows, and no cash is involved.
For many, the only way to get their hands on cash is through a cash advance at 30% or higher interest.
Hey, hey... all that "foolishness" as you put it, is counted as part of the GDP. It must be good! It helps prove the economy is robust.
/sarconol
Dear Steve,
Aww, this brings back memories of my dear, departed father. The engineer/farmer loses his cool and can't understand why no one else seems to understand.
re: "Forgive me for ranting like a madman on TOD..."
We seem to be pretty forgiving here - or, try to be, anyway.
Happy New Year.
Steve,
No forgiveness...just a big thank you for saying (in print) excactly how I feel. Rants like that are appreciated, by me at least. I know how you feel. I refuse to participate in the whole sordid affair. Corporatism is killing us. We'll have nothing to give our children, because of a few sociopathic egomaniacle little $ junkies who can't control themselves enough to see to it that a little bit of the wealth gets circulated to the prolls...(done).
Jeff
I saw a business report the other night that said the retail industry as a whole gets about a $1 billion dollar gain per year in unused redemptions.
I can't source that number because I saw it on a broadcast TV report....it seems like an astonishing number to me.
But then, I am astonished by most numbers I see nowadays! :-)
Either way, that alone would make the whole gift card thing worth doing for the retailers....
RC
That's the way it is suppose dto work. Knowing the den of thieves that run these predatory chain stores, they'll probably double count it -- once when the gift card is sold, then again when the merchandise is sold.
how are they treated by the irs ? are they income at the time of "sale" ? i would assume so. i doubt the irs allows a retailer to treat them as a deposit. i dunno, i am asking.
Upon "sale" of the gift card, the store debits [increases] cash , and credits [also an increase but on the right side of the double entry accounting equation] a liability account probably titled something like "gift cards outstanding" or some such terminology.
When the happy recipient of the gift card buys something, the debit goes to the liability ["gift cards outstanding] reducing that liability by the amount of the sale up to the value of the gift card and the credit [the right side of the equation] goes to sales.
Until the second transaction [the happy customs using the gift card to obtain merchandise] no true sale has occured unless there is a transaction fee on purchase of the card and then only the transaction fee should be recognized as revenue.
Note that the boost in spending over last year
is in today's devalued dollars, so the
"increase" may not be an increase after all.
Todd
Amen Todd. I just found an article online saying that retails sales this Christmas season were 3.6% higher than last year. Many of us suspect that the real inflation rate was around 10% (not the government's "core inflation rate" of 3%). So I would say that most of this "increase" in spending was indeed due to inflation. In fact, one could argue we saw an actual decrease in spending when inflation is taken into account.
Adding to the problem is the fact that stores offered some very heavy discounts this year to encourage customers to spend. While that may encourage more spending, big discounts take away much of the profit. I'd be interested in seeing a figure showing how much actual increase in profits (if any) the stores experienced this year as compared to last year.
Yep...those are the stats that don't get advertised. Sales don't mean squat to a retail company...Gross Margin, Gross Margin % and GMROI (Gross Margin Return on Investment) are the more important business measures.
Exactly. It took me a LONG time to realize this..... the little light bulb lit up when I realized that for all the insane hours I worked, the guy playing banjo at the farmer's markets and train stations, etc., was doing much better and having one hell of a lot more fun.