Gift cards are not just for the big boys anymore. They are starting to pay off for smaller businesses as well.
As merchants look for more ways to attract new customers and add sales, cards are being tried by many independent businesses as varied as a day spa, a cupcake bakery and a plastic surgeon in Beverly Hills.
Prepaid plastic, which used to be found mostly at large retailers, has become more popular with smaller businesses because it is cheap to set up and use, experts said, as well as easier to market and track than traditional paper gift certificates.
"Small merchants are finally seeing that gift cards are offensive weapons," said T. Jack Williams, president of Paymentcard Services Inc., a consulting firm in Henderson, Nev. "They are beginning to understand the cards can drive the incremental sales that are key to survival in this economy."
The numbers are still small. Only about 8% to 10% of small and mid-size merchants use gift cards, said Gregory Grove, president of ECard Systems Inc., a gift-card supplier in Brentwood, Tenn., that targets small and mid-size businesses. Two years ago that portion was about 2%, he said.
He said he could set up a gift-card operation for a small store for about $500 plus a small monthly fee. A basic machine needed to swipe the cards costs about $300 more.
The industry is only "at the beginning of that process, rolling out into the small-merchant marketplace," Grove said.
One small-business owner already using gift cards is Mark Hennessey, second-generation owner of the Santa Monica art and architecture bookstore Hennessey & Ingalls.
The business, which opened a second, smaller location in Hollywood two years ago, added gift cards about the same time and dropped paper gift certificates.
"I could probably go a whole month without selling a gift certificate," Hennessey said.
But with the store's shiny red cards displayed right by the register and promoted online -- and able to be used for online purchases -- he sells more gift cards.
In 2004, when Rodeo Drive Plastic Surgery opened in Beverly Hills, it briefly offered paper gift certificates. But three years ago the practice switched to gift cards, founder Dr. Lloyd M. Krieger said. Many are bought to cover small procedures, but occasionally the gift card amounts will cover more extensive surgeries.
In addition, he said he hands out about 100 cards a month as promotional come-ons. Each is worth $200, which covers the cost of a consultation. About 25% of those cards are redeemed, which is not uncommon for gift cards used as promotions, industry experts said.
At Willow Spa in Santa Monica, co-owner Wendy Reeves uses her gift card program as a tool to build repeat business. A customer who redeems a gift card is offered another piece of plastic: a free rewards card, often loaded with $5 or $10 to use at the 6-year-old business, she said.
The gift card business, which by some estimates totaled about $87 billion in sales in the U.S. last year, began to take off in the mid-1990s.
Gift cards, of course, are subject to a variety of state and national consumer protection regulations as well as laws about how companies should handle the unused card balances. The recent credit card reform law included protections for gift cards that go into effect in August.
California's Department of Consumer Affairs has guidelines that can be found online at www.dca.ca.gov /publications.
Those details aren't stopping more small firms from adding the cards, some bypassing paper gift certificates altogether.
Gift cards have been offered at Sprinkles Cupcakes since the bakery opened in Beverly Hills in 2005. Now with five locations and another handful expected to open nationwide by the end of the year, the retailer relies on its milk-chocolate-colored cards to let more people know about its goodies.
"Word of mouth is still our strongest advantage for our brand," said Charles Nelson, who co-founded the business with his wife, Candace. "Gift cards ... spread the word for you."
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Estimated value of gift cards purchased in the U.S. in 2009
Amount of people who said they would buy at least one gift card during the 2009 holiday season
Cost for a small business to set up a basic gift-card operation, excluding the cost of a card swiper and monthly fee.
Sources: Tower Group Inc., National Retail Federation, Times research