- Starbucks reported $1.77 billion in unredeemed gift card balances – a 9% increase since last year
- This is called “breakage revenue” – essentially free money
- Customer loyalty, tapping into new networks and consumer data collection are other benefits
GIFT cards have long been a staple of modern consumer culture, marketed as a convenient and thoughtful solution to the age-old problem of gifting.
However, the recent news from Starbucks suggests there is more to the story than meets the eye. The coffee giant reported a staggering $1.77 billion in unredeemed gift card balances, a 9% increase from the previous year.
Much of this amount is unlikely to be redeemed, allowing Starbucks to benefit from what is known as “breakage revenue”—essentially free money. This breakage revenue represents about 13.7% of the total gift card balances, providing Starbucks with a form of negative interest on the unused funds.
This pattern of unredeemed gift cards is not new; it has been consistent, with similar revenue figures reported in previous years.
In 2021, Starbucks made $155 million in non-taxable profit from unused loyalty and gift card money – non-taxable because until it appears as profit at the end of the fiscal year, it is considered debt for the company. Loyal customers are essentially providing the company with free debt.
But Starbucks is not alone in this lucrative practice. Many brands, both within the coffee sector and beyond, are reaping the benefits of unredeemed gift cards.
Other coffee brands like Dunkin’ and Costa Coffee, as well as non-coffee retailers like Amazon and Target, also report significant revenues from unredeemed gift card balances.
In a July 2023 survey, the consumer finance company Bankrate found that 47% of U.S. adults had at least one unspent gift card or voucher with an average value of $187. That’s a total of $23 billion.
The mechanics are straightforward: a customer purchases a gift card, and the recipient often forgets to use it or only partially redeems it. The unused balance then becomes pure profit for the company after a certain period.
At first glance, gifting cards seems practical—offering flexibility to the recipient—but the truth is, brands are the real winners here. So why do customers keep coming back for more?
“The reason Starbucks and other gift cards are effective is because they thrive on two-fold convenience,” says Spencer Ross, Associate Professor of Marketing at the University of Massachusetts Lowell.
“First, they’re typically sold at point-of-sale, so they function well as an impulse purchase at the till. They can also be added as an e-gift. In that regard, they’re effective because they represent cash gifts without being cash itself.”
“Second, they’re typically given as quick tokens of appreciation, particularly in gift-giving contexts where the giver doesn’t know the recipient’s tastes that well. They work well because they increase the decision-making convenience by taking the guesswork out of gifting.”
From paper to digital traps
The concept of gift cards is not new. They began as paper vouchers, a simple way for customers to prepay for goods or services. However, as technology advanced, so did the gift card model.
The transition from physical to digital gift cards revolutionised the market. Digital cards, often delivered via email or apps, became more convenient to purchase and distribute. However, this convenience also created “soft barriers” that lead to underutilisation.
Unlike cash, which has universal acceptance, gift cards are essentially a promise to buy from a specific store.
“With the exception of prepaid gift cards from credit card companies – like Visa gift cards – retailer-based gift cards represent a partial commitment on behalf of the giver to the recipient to use the card at that retailer,” says Spencer.
“For the retailer, this means that even a portion of unredeemed balance ultimately comes back to them as revenue as well. In other words, the gift card is not just a pre-commitment to the store but also a pre-commitment to revenue.”
They often come with conditions, such as expiration dates or usage restrictions, making them less likely to be redeemed.
Moreover, digital gift cards have been designed with subtle complexities. For instance, balancing the use of a card with an odd remaining amount can be challenging, leading to partial balances that remain unused.
“For consumers, the problem is that the glut of gift cards can also make them difficult to keep track of – how many gift cards does a consumer practically have, and at which stores?” says Spencer.
“If you get a $5 gift card, buy a coffee for $4.53 and have $0.47 remaining on that card, what are you going to do with it? On the flipside, if a drink is $6.84 and the card is $5, the gift has precommitted $5 and the consumer has kicked in an additional $1.84 of revenue beyond that.”
“So regardless of whether the card is fully used, partially used, or not used at all, the company essentially ‘wins’ some, all, or more revenue from that card. In other words, the ‘cash’ is locked into that gift card ecosystem.”
In other cases, people simply forget they have a digital gift card buried in their email or app, and companies are banking on this forgetfulness.
Over time, the incentive has shifted from genuinely offering a flexible gift option to subtly ensuring that not all gift cards will be redeemed.
This shift is even more evident when considering that brands can increase their product prices, secure in the knowledge that they have a guaranteed sale at the card’s face value—potentially at a premium compared to competitors.
The digitalisation of gift cards has also facilitated and increased the number of scams. In 2022, nearly 65,000 consumers were swindled out of more than $228 million in gift card scams, according to the Federal Trade Commission.
Gift card resale has also become a booming industry. It involves buying and selling gift cards through various channels, essentially “flipping” them to make money.
Customer loyalty and data – a game changer
Gift cards have always been about more than just a financial transaction; they’re also a tool to promote customer loyalty.
By encouraging consumers to return to their stores, brands aim to foster a sense of community and repeat business.
With the ongoing cost-of-living crisis, high prices have emerged as the number one threat to customer loyalty. In response, brands are doubling down on strategies to lock in customers, and gift cards are a key part of this strategy.
But the game has changed since the early days of gift cards. In today’s data-driven economy, information is a powerful currency. Gift cards offer brands a way to collect valuable consumer data—voluntarily provided by the customers themselves.
Every time a gift card is purchased, redeemed, or even partially used, it provides insight into consumer preferences, spending habits, and shopping behaviours. This data allows companies to tailor their products, services, and overall brand experience to better suit their customers, fostering loyalty through personalisation.
“In the case of e-gifts, they’re not even tangible cards – they’re ‘platformed money ecosystems’,” says Spencer.
The concept of a ‘Platformed Money Ecosystem’ was put forward by a research paper that posits that the increased embeddedness of digital financial platforms within consumers’ lives, and their subtle transformation into data, “produces data at the micro-level, monetizing data at the meso-level, and regulating data at the macro-level.”
“Everything electronic – like cards, apps, etc. – allows for the tracking of consumer data in ways that the gift certificates of yore didn’t do, back when they were actual certificates,” says Spencer.
“Companies can compile multiple big data sets to bolster their consumer profiles and better target promotions, advertisement, and respond to shifting consumer tastes through product development.”
In this light, gift cards serve a dual purpose: they provide brands with a revenue boost from unredeemed balances and a treasure trove of data to refine their marketing strategies. Starbucks, for example, makes around 10% of its income from unredeemed gift cards while also collecting invaluable data on its customers.
So, who is gifting whom? While consumers believe they are giving the gift of choice, it is the brands that are receiving the true gifts: steady revenue streams, locked-in customers, and a wealth of data.
As convenient as gift cards may seem, they are also a clever marketing trick—one that benefits the brands far more than the gifters or potential giftees.
In the end, it appears the real winners in the gift card game are not the ones giving or receiving, but the companies themselves, capitalising on every swipe—or lack thereof.
Coffee Intelligence
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