Plastic Card Punching: “The European Gift Card Market . . . all wrapped up”; Global Identification; March 2008

Retailers in Europe, Asia, Latin America and other geographic regions outside North America are expected to soon see a duplication of the fast growing gift card market that took root in the United States approximately a decade ago. This gift card market has proven to be highly profitable for printers, plastics decorators and card manufacturers that pursue the gift card manufacturing niche. The capital investments needed to enter the market for manufacturing gift cards are relatively modest, especially for businesses that have already acquired some of the printing equipment and/or finishing equipment widely used in gift card manufacture.

In this white paper we will discuss the equipment and tooling involved in gift card manufacturing, technical considerations that impact production efficiency and ability to meet market demand for design flexibility, and the relative strengths and competitive advantages of various types of companies in gaining market share in emerging gift card markets outside North America as well as in the maturing North American market.

Background—Dynamics of North American Gift Card Market

From the vantage point of continents outside North America it may seem that gift cards are a uniquely American phenomenon that is unlikely to move beyond its borders. A better understanding of how the gift card market developed in the U.S. should dissuade this mistaken viewpoint.

A decade+ ago in the U.S., gift cards were a rarity and commonly perceived as a second rate gift choice. Data from the 2005 holiday season reflect how quickly this dynamic changed. It was reported that 76% of adults had purchased one or more gift cards. The average purchase was 4.7 gift cards. The average card value was US$38+.

Most Americans can comment anecdotally on how this trend is reflected in their particular gift giving habits. While gift cards may have initially seemed a bit impersonal and crass, there are now many situations where they are now perceived as the more thoughtful gift. Rather than burdening a friend who is an amateur chef with another pot or pan they already own, a gift certificate to a specialty cooking store would now seem the better option. Similarly, a gift certificate to a bookstore may seem like the best way to avoid giving an avid reader a book they already own or have read. Few mature adults would now dare to give a teenager clothing for fear of violating their sense of teen style, but giving a gift card to a popular teen clothing retailer is a gift of choice. Add to that the logistical ease that gift cards provide to gift givers who are in relatively remote locales, aging and somewhat housebound, or geographically removed from the gift recipient such that shipping services would otherwise need to be involved if they weren’t simply mailing an envelope with a gift card.

Behind this sea change in consumer (end-user) demand for gift cards are the compelling financial benefits that gift cards provide to retailers. Gift cards are no longer considered to simply be payment vehicles under the aegis of retailers’ accounting departments. Rather, most U.S. retailers now consider gift cards to be one of their products, and in many cases, the SINGLE LARGEST SELLING PRODUCT that they offer, accounting for 1.5% – 4% of sales. In the retail arena any single product that accounts for that portion of sales is quite significant and it follows that gift card programs are now aggressively marketed by sales and marketing departments, and not by finance managers.

But the benefits to retailers go far beyond the gross sales numbers from gift cards. Retailers know that every gift card sale has an additional upsale, i.e. purchases beyond the value of the gift card on the order of US$1.20 – $3.00 added to every US$1.00 gift card value. Retailers also consider that the gift card sale involves cash up front with the actual delivery of merchandise coming later and sometimes much later. This is in effect a cash loan to the business.

Gift cards are also valued by retailers for their advertising value. They are seen as functioning as mini-billboards for a retailer, driving floor traffic to the store. For retailers that populate the suburban shopping malls in the U.S. this is known as “the driveway decision”. If a potential customer is choosing which store to go to they are more likely to choose the one for which they have a gift card in their wallet.

Unlike other marketing and advertising ventures that retailers pursue, gift card programs are very easy to track and monitor. Most gift cards are redeemed within 45 – 90 days of purchase and 95% of cards are redeemed within one year. This level of predictability has enabled retailers to experiment with many different card designs and merchandising programs and to have relatively exact measurements of their success. From the consumers’ viewpoint, it means that one can find a wide variety of themes for gift cards – sporting events, school graduations, winter holiday, movie themes, etc.

In recent years gift cards have come to be used in ways that were not imagined a decade ago. Many cash transactions have been replaced with gift cards—from loyalty programs, mail-in rebates, markdown sales, etc. They are seen as a tool to better manage fraud in cases where suspect merchandise is returned. Instead of having relatively inexperienced sales clerks challenge such suspicious returns they simply handout gift cards that can be de-activated by senior management upon research into the situation.

Business-to-business uses for gift cards are fast growing recnt developments. They are now being widely used for employee reward programs, sometimes in a barter/swap mode between companies. This is especially valued by retailers who note that these type gift card programs bring a much higher percentage of entirely new customers to their stores. Some retailers consider this advertising value to be so significant that they are willing to sell or swap gift cards for business-to-business programs at less than face value.

A corollary of the maturing gift card market in North America has been the creation of a new industry, the third party data handling companies that have increasingly become turnkey sources for most aspects of gift card program operations. These companies handle all record keeping and account transaction details. They usually set up the networks over which data is handled and they also handle inventory matters, ensuring that all stores are adequately stocked with the various gift card products. Unlike credit cards that involve typical transaction costs of 1.5%, a gift card’s cost per transaction (i.e. redemptions, activation, or recharges) is generally US$0.05. This has meant that most retailers, who can all be assumed to have sophisticated IT expertise in-house, nonetheless have found it far easier and cost-effective to farm out the management of gift card programs to these data handling services. In turn, this has meant that the overall management of gift card programs, basically designing and implementing store-wide marketing initiatives for gift card products, is often handled by a single senior level marketing executive even in very large retail companies. Printers, plastics decorators and card manufacturers with fairly developed gift card manufacturing niches sometimes have little direct contact with these gift card program managers at the retail level, but instead are dealing with third party intermediaries who act as de facto gift card manufacturing brokers.

From the aforementioned account of North American gift card market dynamics there are several conclusions one can draw about potential for duplication of this phenomenon abroad. First, even if gift card markets in different regions grow to be only a fraction of what exists in North America, it would still represent quite a large opportunity, e.g. on the order of several million cards per annum and billions of Euros per annum. Second, gift cards elsewhere are likely to similarly take on importance as advertising media, as they have in North America. That means that cosmetics are all important, as is novelty in design. Equipment and tooling with the needed versatility to accommodate this desire for unique design and packaging therefore is likely to be as important elsewhere as it is in North America. Third, as gift card markets mature the variety of gift card products offered by major North American retailers multiplies and their product lifecycles become shorter, such that production line efficiency with shorter runs increasingly defines which companies are more competitive in the gift card manufacturing niche. Fourth, the desire for unique packaging for gift card products also gives a competitive advantage to companies that have ability to do turnkey card plus packaging in-house or who can best create working partnerships to deliver similar total packages to the retail customer or their third party intermediaries. Fifth, the third party data handling companies that specialize in the gift card niche can be expected to help grow interest in gift card merchandising programs as they expand globally. In fact, two of the larger U.S. companies of this type have recently set up shop in Europe with this very intent.

Equipment for Gift Card Manufacture

By some estimates, the total cost of entry for the gift card manufacturing market could be about US$500,000.00 for plastics printing companies, which is not a significant deterrent for those that are already accustomed to high costs of sophisticated printing presses or the like. This also speaks to the potential for gift card manufacturing services to become as competitive as the increasingly price-driven financial card manufacturing has become in recent years.

However, most players in the North American gift card market already had made the needed investments in equipment – e.g. printing presses, high precision optically-registered die cutting equipment, laminators, etc. – before they developed a gift card niche. These companies had been using this equipment to manufacture other products and in many cases continue to do so. For example, there are many similarly highly profitable fast growing U.S. market niches (refrigerator magnets, specialty advertising products, gaskets, loyalty cards, hangtags, etc.) that rely on the high precision steel rule die cutting systems commonly used for gift card manufacture and there are several highly profitable companies selling gift card manufacturing services whose broader specialty can be defined as expertise in steel rule die cut products. Printing equipment and processes need to be able to handle plastic substrates. Most gift cards use magnetic stripes to encode data, which requires the types of personalization equipment already in use by financial card manufacturing companies. However there is no absolute requirement for cards to store data in this way and some major U.S. retailers rely on simpler bar coding to store data.

To date, the great range of gift card designs have nonetheless been limited to those that create wallet-sized cards. This probably has most to do with retailers’ desires to have gift cards easily accessible to consumers and to function as portable mini-billboards. Many gift cards do look like credit cards dimension-wise, but actually are rarely held to the same exacting ISO standards. Corner radius of these cards might vary, for example. This is because gift cards only need to be read by one type of card reader, usually a swipe type, ultimately affording designers much more latitude in card dimensions and designs.

Another common denominator of gift card manufacturing is that all designs require die cutting capabilities. The better systems that deliver cut-to-print registration accuracy of +/- 0.1 mm are usually required for the varying shapes of gift card offerings. The versatility of die cutting systems to handle changing shapes and dimensions of gift card products has had great impact on gift card manufacturers staying power in the market. Those with the more flexible modular designed die cutting equipment that can interchange sheet with roll fed or interchange different types of dies and different modes of parts extraction have enabled many gift card manufacturers to evolve as the market has required. Currently, for example, the so-called “sombrero” card is becoming a very popular design. These are rack cards that have a score line for a break-off ISO CR80-sized card held within a point-of-sale carrier that has a broad somewhat triangular slot knockout for the card hanger that makes it easy to get off a hook. (Note: its “sombrero” nickname comes from its similar shape to that of a hat.)

It’s axiomatic to say that those companies with better operating efficiencies tend to become the most competitive in the marketplace. However, this point cannot be overemphasized when speaking of gift card manufacture, given that gift cards function as retail products where as little as 0.5% of margin will be considered a deal maker or breaker to the retail buyer. This is one reason why gift card manufacturers that have invested in automated inspection technology have been able to gain competitive advantages. These companies are better able to deliver the cosmetic qualities required with better production efficiencies. However, not all automated inspection systems offered in the marketplace have proven capable of adapting to the gift card products. The best-in-class automated inspection systems can fully inspect both sides of typical gift cards at the rate of 36,000 cards/hour. These better inspection systems also use the type of open system design that can adapt to non-standard card dimensions (e.g. double CR80 “sombrero” designs) and special features such as bar codes and UV feature inspection.

Proficiency with shorter runs is the specific type of production capabilities most required from equipment and operating procedures. Any and all equipment features that facilitate shorter runs help give gift card manufacturers a competitive advantage. There are a host of equipment features to consider in this light. For example, some steel rule die cutting systems automatically reposition dies for rapid job changeovers. Modularly designed die cutting systems allow interchange of hard tooling or steel rule dies within minutes, while other equipment configurations are fixed and inflexible. Some automated inspection systems are smart systems that can quickly train on “good” cards, bypassing time-consuming programming during job setups. Some automated inspection systems can fully inspect multiple features in a single pass, while less sophisticated systems require slower multiple runs or combination with hand inspections.

Tooling Decisions for Gift Card Die Cutting

Tooling choices have great bearing on the success that gift card manufacturers have in meeting market demand for unique shapes and designs and doing so with maximum efficiency. There are five types of tooling that the better equipped are usually called upon to use – 1) steel rule dies, 2) standard male/female hard tooling, 3) progressive dies, 4) compound dies, and 5) modular dies. Gift card manufacturers that are not equally versed in these different types of tooling or that use die cutting equipment unable to accommodate these various types of dies are at a competitive disadvantage.

 

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