Gift Cards Still Popular But Sales Growth Is Slowing

Gift cards are still at the top of everyone's wish list this holiday season, but growth is expected to slow dramatically from last year.

The National Retail Federation predicts gift card sales will rise 6 percent this year, to $26.3 billion. outpacing the expected 4 percent increase in overall retail sales but a significant slowdown from last year's 34 percent jump in gift-card sales.

Kevin P. Casey / AP A Starbucks gift card is swiped at the register of a Starbucks store.

In recent months, retail spending has slowed at U.S. chain stores, and there are signs that consumers are taking a cautious approach to holiday spending amid a weak housing market and credit crunch.

"Many consumers pulled back on spending for themselves this year and are hoping to receive a gift card so they can purchase something they may have had their eye on for months," said NRF President and CEO Tracy Mullin in a statement.

The NRF's forecast, which is based on a survey conducted by BIGresearch for the National Retail Federation, means the average shopper will spend $122.59 on gift cards this year -- up from $116.51 in 2006.

Gift cards surged in popularity last year as new technology and wider distribution and aggressive marketing made the cards readily available. This year, retailers are finding new gimmicks to attract consumers.

Home Depot is offering a DVD-gift card that offers home improvement tips, while Macy's is allowing its customers to personalize gift cards with their own photos. Starbucks packages its cards in little red mittens, while Target's gift cards can sing or tell you if you've been naughty or nice.

For both consumers and retailers, gift cards have their advantages. They are convenient and easy to give and sell, said George Whalin, president and chief executive of Retail Management in Carlsbad, Calif.

"They encourage shoppers to come back to the stores in January, when they otherwise might be slow," Whalin said.

There's also a dirty little secret. "Nobody will talk about it, but there is a significant percentage of the gift cards that never get redeemed," he said.

According to a survey from Consumer Reports National Research Center 27 percent of those surveyed who had received gift cards last year have not used one or more of them. That's up from 19 percent at the same time last year.

More than half of those survey respondents said they had not used their card yet because they did not have time, while 35 percent said they could not find anything they wanted. Almost one-third said they did not use their card because they forgot about it.

In an interview on CNBC's "Squawk Box," National Retail Federation Vice President Scott Krugman said retailers aren't benefiting from the unspent gift cards.

"They're saying that money left on the table by consumers is going into retailers' pockets," Krugman said. "They know nothing could be further from the truth. The fact of the matter is, a retailer doesn't count the sale of a gift card until it's actually redeemed for merchandise."

Consumer Reports also warned consumers to cash in gift cards sooner rather than later because some cards have expiration dates or charge fees for holding on to the card for an extended period of time.

"I think of the top retailers, a mere 8 percent have, actually, expiration dates and dormancy fees," Krugman said. "They should be going after the banks. Bank-issued gift cards tend to have predatory fees associated with them, anywhere from five to ten dollars just to buy the card, and in some cases, you have to pay a fee just to check the balance."

In an interview with CNBC.com, Krugman said retailers will be doing what they can to make sure consumers redeem their gift cards quickly.

"Retailers are planning on moving new merchandise into the stores in January," Krugman said. "Having those gift cards sitting on the books is a real liability. I think we're going to see more of a marketing push to get those customers back into the stores."

Andrew Fisher contributed to this report.

© 2009 CNBC.com