Don't Be a Goat! How to Avoid Gift Card Accounting Pitfalls

Tax season is upon us! It’s the most wonderful time of year… for some people. (I’m looking at you, IRS.) As for the rest of us, it’s our responsibility to make sure that we have all of our financial ducks in a row.

Personal taxes aside, if you’re in any sort of managerial position, chances are you’ve also got some business expenses for which you need to account. Many of our restaurant marketing clients here at Paytronix sell their gift cards through a variety of channels: in-store, at grocery stores, online, and at wholesale warehouses like Costco. This multi-channel strategy boosts gift card sales, while also expanding a brand’s visibility and reaching new customers. It also requires thoughtful tracking and reporting practices for third party channels. When you're implementing a gift card platform, make sure that the integration between your POS and gift provider facilitates real-time, accurate, and comprehensive reporting.

With that in mind, I’d like to share some lessons we’ve learned from working with our clients over the years. To give this a little more “real-life” flavor, I’ll illustrate a common scenario of gift card accounting as it relates to third party channels.

Congratulations, you’re now the CMO of a regional restaurant chain. In a plan to acquire more customers, you’ve decided to sell your gift cards through Costco.

This is what a typical Costco deal might look like:

You’ll load $100 on to the gift card. The consumer will only pay $79.99 for the gift card and Costco will take a cut out of that fee, let’s say $9.99. The amount realized in cash is $70 and the net discount that needs to be accounted for is $30.

Because of the heavy discount associated with this, you’ve made the case to your CEO and CFO that this campaign will drive customer acquisition and have a positive ROI. Before you ran the full-fledged campaign, you tested Costco sales last summer in one region. You then looked at the same-store sales where gift cards were used at locations nearby the Costco. Sales were up! You also compiled survey results from those same stores and determined that the surveys were filled out by new customers. You even asked your GMs to look at the guests using the gift cards and tell you if they thought they were new to the store. The GMs agreed with you; those guests were brand new.

Yay! Pat yourself on the back! This test was a huge success! The ROI on the Costco-sold gift cards was positive for the company in the sense that it brought in new customers. You presented these results throughout your organization to operations, finance, and the CEO. Everyone agreed with you that the project was a success. And since it was a success, you wanted to go bigger. More = more, right?

So, in December you went out and did a $3 million deal with Costco because anyone worth their marketing snuff knows that December is a fantastic month for gift card sales and, boy did it deliver. This deal represented a 75% increase in your annual gift card sales. You’re now a total rock star at the company holiday party. Everyone is toasting you, telling you that you knocked this one out of the park… right?

Let’s take a step back.

If you met all your goals and saw a great ROI, you’d undoubtedly be a hero! If your project went down in flames, you’d be a goat in the eyes of your colleagues. No one wants to be a goat. So what do you think? Do you think that the CMO in our story was a hero? Or a goat?

OR

I’m sure you can see where this is leading, but...

The CMO was a goat.

So what happened? Why was this project a failure?

Well, the $900,000 discount given to Costco had to go somewhere. So, it was treated as an expense in December. This reduced the merchant’s annual profitability by almost $1 million dollars. The brand missed its annual goals and the CEO and senior team did not get their bonuses. Much gnashing of teeth and wringing of hands ensued.

There is a lesson to be learned here though. This outcome was 100% preventable and it only happened because of a lack of understanding of gift card accounting principles, combined with poor planning.

Unfortunately, (or perhaps fortunately, if you’ve read this far) I’ve reached my word limit for this article. You can find out how to be a hero in situations like this one and learn more about how to account for your gift card sales by listening to our Accounting for Gift Card Growth Channels webinar. This is one of our denser webinars, but when you’re the toast of your next holiday party, you’ll be glad that you took the time to listen. Especially if it will help you avoid a $1 million mistake!