Gift cards become worthless plastic in retailer bankruptcies

DISCUSSION TOPIC:  Bankrupting Gift Cards


That gift card you’re holding might not be worth the plastic it’s printed on. As it turns out, one of the casualties of retailers filing for bankruptcy protection are gift card balances that get zeroed out in the process.

Brian Riley, senior analyst at The Tower Group, told the AP that consumers could lose more than $75 million from stores and restaurant closings this year.

Not honoring gift cards can come back to bite retailers who find customers have moved on to other stores.

Brookstone has sought to take advantage of the ill will created by Sharper Image’s refusal to accept its gift cards by offering 25 percent off any purchase to consumers who hand over the now worthless plastic at the time of purchase.

Sharper Image has said that it intends to reinstate the cards at some point in the future although it did not provide a date when questioned by the AP.

Not all companies that go into Chapter 11 immediately void their cards. In the recent case where NRDC Equity Partners bought Fortunoff, the new owner decided to honor the gift cards.

Discussion questions: Is there any way for a retailer to rebound from the bad taste it creates by refusing to honor gift cards? Do you see consumers losing confidence in buying gift cards this year due to news of retailer bankruptcies and closings?

My post:

There is no logical reason for a company that expects to emerge from bankruptcy protection to choose not to honor their gift cards.  It goes beyond lack of common sense to pure stupidity.  Kudos to the new owners of Fortunoff to have the vision to honor their gift cards.  Sharper Image has made so many common-sense errors in recent years that it does not surprise me that they would decide in their filing not to honor their gift cards.

However, the part we may not understand is the bankruptcy court’s attitude on this issue.  The idea of a bankruptcy filing is usually to ensure maximized value for the bond holders and the preferred share holders – not the common stock shareholders and certainly not the consumer.  So it may make sense to cancel the gift card liability as part of the value-maximization effort.  Regardless of this financial necessity, it is suicide to good customer relations and likely guarantees an eventual failure for that retailer.

Mike Osorio, your Dare to be Contagious! TM strategist



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