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Hard Times: Gift Cards Are Used For Cash, Necessities

Late December and early January are typically when shoppers flock to the malls to spend their gift cards on discounted merchandise. This year, a lot of shoppers don't want sales. They want the cash.

"Consumers are obviously in dire straits economically and they're going to cash a lot of those cards in for cash, not necessarily goods," said George Whalin, a retail analyst with Retail Management Consultants.

There are more than 6,000 gift cards for sale on eBay right now, up from about 4,000 around this time last year. And Plastic Jungle, a gift-card-resale site, estimates that traffic on its site is up about 30 percent from last year.

Most consumers use these sites to get cash—though usually at less than the gift card's face value—or to swap for other gift cards that can be used to buy food and other necessities. But others are approaching shoppers directly, gift cards in hand.

I experienced this firsthand while scouring the stores for bargains a few days after Christmas. A woman approached me in a department store, asking if I could use a $25 store gift card to buy the sweater I was holding in return for cash. She said she had recently lost her job and needed the money.

When I told her my item wasn't that expensive, she found someone else to split the card with me so she could get back the full $25. After we completed the transaction at the register, she thanked me profusely, then asked, "Do you know anyone who's hiring?"

Said Whalin:"The cash situation is real, given the economic problems we've got these days."

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Gift-card sales have been rising since they began circulating about 15 years ago. But that trend hit a brick wall this year as consumers cut back and worried about their future. They also had doubts about the future of retailers from which they might, under different circumstances, have bought a gift card.

Gift-card sales are expected to be down about 6 percent this year, according to a November projection from the National Retail Federation, though it could be much worse. Tom Chin, managing director at the Telsey Group, estimates that the percent decline could be in the high single digits or low double digits.

"We're in new territory here," Whalin said. "Since gift cards came about, we haven't seen anything like this."

And that has shoppers behaving differently as well.

"Practical is the new black," said Scott Krugman, a spokesman for the National Retail Federation.

Even though the collapse in consumer spending didn't hit until the fall, the trend toward pragmatism had begun to peek through as early as January, Krugman said, when Wal-Mart revealed in its January-sales report that shoppers were using their gift cards for food and not electronics or toys.

At least then, they were spending on something. Gift cards don't get counted as sales until they're redeemed, so when shoppers cash in their gift cards for cash, "it's essentially a lost sale," Whalin said. "That will certainly have an impact on retailers."

Some states, like California, have a law requiring retailers to allow customers to cash out the balance on their gift card if the balance is under $10, though retailers don't, for obvious reasons, publicize this option and often don't inform their sales associates, which can make the process clunky.

For those customers who need more than $10 but aren't quite ready to hit the mall, hat — and gift card — in hand, there's a whole cottage industry of gift-card resale sites that allow customers to trade them in online.

Krugman cautions that some of the gift cards up for auction online are fraudulent. But sites like Plastic Jungle, Card Avenue, Swap a Gift, Gift Card Buyback and Gift Card Rescue verify the value on the card to ensure that the transaction is legit.

Plastic Jungle has a "Cash In Now" option that allows users to get the cash immediately, without waiting for the auction process. Swap a Gift even offers users the option to pay their bills with their gift cards.

The tradeoff with most of these options, however, is that users don't get the full value of their card in cash. It's possible to get up to about 95 percent of the value back in cash, though how much a user gets back largely depends on the demand for that store's card. Of course, with instant-gratification offers like Plastic Jungle's, the redemption is more like 65 percent.

One way users can get 100 percent of the value on the card is to do a gift-card trade through one of these sites. Maybe they trade a $100 Macy's gift card for a $100 Wal-Mart card, using it to buy food and other necessities, or a gasoline card.

Generally, it's free to list cards and they're usually sold within a month — some within minutes.

Not only are people cashing in their gift cards this year but they're also returning gifts they received to get the cash — not a good sign for retailers, especially given that early estimates indicate holiday sales fell as much as 4 percent from last year, according to data from MasterCard Advisors.

The return rate on merchandise is usually 6 to 7 percent after the holidays, but it will probably be more like 9 percent this year, Chin said.

And, while projections from just a few months ago indicated that a recovery might occur by the middle of next year, analysts now say it's not going to happen in 2009 — more like 2010.

"Consumers are just not confident," Whalin said. "They're afraid to spend money."

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