The New Plastic

By Mary L. Carlin , Contributing Editor | April 01, 2007

In the restaurant industry, 2007 looks like the year of the gift card. Encouraged by the groundbreaking success of Starbucks and McDonald's, many table service restaurants also transitioned to gift cards for the last holiday season. They're popular with customers, and they promote repeat business. Here's the rundown of where the gift card market is heading, and the pitfalls to watch out for.

1. Web sales.
Online purchasing of restaurant gift cards is taking off and will continue to grow as restaurateurs look to streamline sales and take pressure off of on-site staff. Union Square Hospitality Group runs nine New York restaurants, including the prestigious Gramercy Tavern. Operations Manager Jen Burgess explains:

"We recently launched an e-commerce site that sells gift cards for all the restaurants in our company, which has been very successful. In only its second month, and with no advertising other than links on our respective restaurants' Web sites, we sell an average of 3-6 cards a day, for about $15,000 in revenue per month. I'd like to see all of our gift card sales happen through our Web sites instead of over the phone. It would free up our reservationists to do their job and streamline the procedure in the process. The less people you have issuing cards, the smaller the margin for error and the easier it is to trace mistakes."

Burgess, whose company uses a customized gift card solution from The Customer Connection ( www.custcon.com; a Micros business partner) advises other restaurant companies to "sell them online as soon as possible."

2. Co-branding.
Multi-unit restaurant companies are co-branding their gift cards under one umbrella, regardless of the diversity of their portfolio. Beyond simplifying their gift card accounting, benefits include customer crossover and giving new or less successful restaurants a boost by association with their more popular or more established siblings. Customers also like the option of selecting from a range of restaurants to redeem their gift cards. It is best to include co-branding in your initial gift card program, because it is costly and time consuming to change from individual restaurant cards to the umbrella model afterwards.

3 Multiple uses. Many restaurants are using gift cards in-house to keep track of    employee meals and rewards, bartenders' complimentary drinks funds, and other areas of accounting. Explains Burgess  of Union Square:

"Our company currently uses six different types of electronic cards per restaurant -- each restaurant has one regular gift card for sale to the general public and five types of cards for various internal uses (house account, trade account, comp, donation, and employee dining). All of the cards function differently (some can include tip, some cannot, some are tax exempt, some are considered •payments' in our POS, some are considered discounts, etc.), and that has caused us a number of programming and reporting challenges."

This trend is gaining traction as restaurants look to tighten up their accounting, but sometimes it is better to wait until the customer rollout is complete. In hindsight, Burgess says, "We may have gone with a simpler route and not chosen to tackle so many varying card types at once."

4. Staff incentives.
Café Rio Mexican Grill moved from paper to gift cards in all of its 13 Utah-based restaurants in December 2005. CFO Bob Baker chose Micros (www.micros.com )  iCare's CRM and gift card program to integrate with the POS. "I wish we'd done more incentive-based selling earlier on. We introduced a team system at the end of 2006 and got a 30 percent increase on a same-store basis, taking gift cards as a percent of total sales. We published results daily, and gave away fleece jackets and iPod nanos."

5. Sweepstakes & other offers.
Upscale sport bar chain Champps switched from paper certificates to gift cards from Comdata ( www.comdata.com , formerly known as Stored Value Systems) four years ago "to give our guests a sense of value," explains Steve Johnson, VP of information systems. "It's really impacted our sales. We've done gift card sweepstakes for specific locations and demographics by handing out or mass mailing gift cards valued from $3-$300. Customers come in to use them and learn what their value is. That's been creating some excitement."

Given the fact that 10 percent to 3 percent of gift cards are never redeemed, one restaurateur decided to sell $100 in gift cards for $90. Guests tempted in with a free $5 gift card for a new restaurant would then reload it to take advantage of the additional discount. There are important differences in redemption: complimentary gift cards cannot be programmed to give cash back, but purchased gift cards normally will.

6. Personalization.
Many restaurants offer customers a variety of gift card designs, particularly for the holidays, but this can be expensive. Dr. Clark Kincaid, assistant professor of the William F. Harrah College of Hotel Administration at the University of Nevada, Las Vegas, sees another trend emerging: "Some restaurants, including QSRs, now offer a variety of specialized gift card sleeves with standardized cards inside. They display sleeve options such as Congratulations, Happy Birthday, etc., in effect showing the customer that •This is what these cards are for.' The sleeves drive sales and control costs by enabling the restaurants to use standardized cards inside the fancier sleeves." Other restaurants are offering gift cards personalized with customer photos.

7 Combining gift cards with loyalty programs.
Some gift cards include frequent buyer data, enabling restaurants to extend offers as customers come in, for example offering a free dessert on their fifth visit. Says Steve Johnson, "I see more loyalty programs being wrapped in with traditional gift card programs. They enable more intelligence and data collection on what customers are eating." Café Rio's Bob Baker concurs. "I see more gift cards and frequent buyer clubs combined. Micros iCare can include loyalty with gift cards to build points," he says. Burgess is already looking to extend the technology: "I'd like to have an all-encompassing software program that links gift card use and purchases between our POS and reservation software and is somehow integrated with a loyalty program, i.e., when you make a reservation on OpenTable, it knows you've eaten there six times, you dined there last month, ate the duck, had four in your party, used a gift card, and purchased the card online on February 3rd using the same AmEx that you paid for the dinner with. Then we could send a thank you email and add $10 to your card for your loyalty."

8. Levying fees.
Following the example of retail gift card programs, some restaurants are levying fees if certain conditions aren't met. The Quiznos card, for example, deducts $1 per month if the card hasn't been used in 24 months, until the value reaches zero dollars. However, this is not valid in states where the practice is prohibited.

9. Offsite data storage.
Some gift card programs reside locally on a back-office PC. These must be backed up regularly to avoid the risk of losing data in a fire or other destructive event. Many vendors offer Web links for tracking customer balances and recent transactions, but need to be downloaded and stored locally in case connectivity is lost.

10. Biometrics.
Pilots are being done to test customer acceptance of thumbprint readers as a replacement for gift, loyalty, credit, and debit access and approvals. Retinal scanning is also being tested, but some find the technology too invasive. As public applications for biometrics increase, customer acceptance will follow. Gift cards may be harder to lose or duplicate than paper certificates, but thumbprints are forever.

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