Technology Guide for Capturing Gift Card Market Opportunity

Retailers in Europe, Asia, Latin America and other geographic regions outside North America are expected to soon see a duplication of the fast growing gift card market that took root in the United States approximately a decade ago. This gift card market has proven to be highly profitable for printers, plastics decorators and card manufacturers that pursue the gift card manufacturing niche. The capital investments needed to enter the market for manufacturing gift cards are relatively modest, especially for businesses that have already acquired some of the printing equipment and/or finishing equipment widely used in gift card manufacture.

In this white paper we will discuss the equipment and tooling involved in gift card manufacturing, technical considerations that impact production efficiency and ability to meet market demand for design flexibility, and the relative strengths and competitive advantages of various types of companies in gaining market share in emerging gift card markets outside North America as well as in the maturing North American market.

Background—Dynamics of North American Gift Card Market

From the vantage point of continents outside North America it may seem that gift cards are a uniquely American phenomenon that is unlikely to move beyond its borders. A better understanding of how the gift card market developed in the U.S. should dissuade this mistaken viewpoint.

A decade+ ago in the U.S., gift cards were a rarity and commonly perceived as a second rate gift choice. Data from the 2005 holiday season reflect how quickly this dynamic changed. It was reported that 76% of adults had purchased one or more gift cards. The average purchase was 4.7 gift cards. The average card value was US$38+.

Most Americans can comment anecdotally on how this trend is reflected in their particular gift giving habits. While gift cards may have initially seemed a bit impersonal and crass, there are now many situations where they are now perceived as the more thoughtful gift. Rather than burdening a friend who is an amateur chef with another pot or pan they already own, a gift certificate to a specialty cooking store would now seem the better option. Similarly, a gift certificate to a bookstore may seem like the best way to avoid giving an avid reader a book they already own or have read. Few mature adults would now dare to give a teenager clothing for fear of violating their sense of teen style, but giving a gift card to a popular teen clothing retailer is a gift of choice. Add to that the logistical ease that gift cards provide to gift givers who are in relatively remote locales, aging and somewhat housebound, or geographically removed from the gift recipient such that shipping services would otherwise need to be involved if they weren’t simply mailing an envelope with a gift card.

Behind this sea change in consumer (end-user) demand for gift cards are the compelling financial benefits that gift cards provide to retailers. Gift cards are no longer considered to simply be payment vehicles under the aegis of retailers’ accounting departments. Rather, most U.S. retailers now consider gift cards to be one of their products, and in many cases, the SINGLE LARGEST SELLING PRODUCT that they offer, accounting for 1.5% – 4% of sales. In the retail arena any single product that accounts for that portion of sales is quite significant and it follows that gift card programs are now aggressively marketed by sales and marketing departments, and not by finance managers.

But the benefits to retailers go far beyond the gross sales numbers from gift cards. Retailers know that every gift card sale has an additional upsale, i.e. purchases beyond the value of the gift card on the order of US$1.20 – $3.00 added to every US$1.00 gift card value. Retailers also consider that the gift card sale involves cash up front with the actual delivery of merchandise coming later and sometimes much later. This is in effect a cash loan to the business.
Gift cards are also valued by retailers for their advertising value. They are seen as functioning as mini-billboards for a retailer, driving floor traffic to the store. For retailers that populate the suburban shopping malls in the U.S. this is known as “the driveway decision”. If a potential customer is choosing which store to go to they are more likely to choose the one for which they have a gift card in their wallet.

Unlike other marketing and advertising ventures that retailers pursue, gift card programs are very easy to track and monitor. Most gift cards are redeemed within 45 – 90 days of purchase and 95% of cards are redeemed within one year. This level of predictability has enabled retailers to experiment with many different card designs and merchandising programs and to have relatively exact measurements of their success. From the consumers’ viewpoint, it means that one can find a wide variety of themes for gift cards – sporting events, school graduations, winter holiday, movie themes, etc.

In recent years gift cards have come to be used in ways that were not imagined a decade ago. Many cash transactions have been replaced with gift cards—from loyalty programs, mail-in rebates, markdown sales, etc. They are seen as a tool to better manage fraud in cases where suspect merchandise is returned. Instead of having relatively inexperienced sales clerks challenge such suspicious returns they simply handout gift cards that can be de-activated by senior management upon research into the situation.

Business-to-business uses for gift cards are fast growing recnt developments. They are now being widely used for employee reward programs, sometimes in a barter/swap mode between companies. This is especially valued by retailers who note that these type gift card programs bring a much higher percentage of entirely new customers to their stores. Some retailers consider this advertising value to be so significant that they are willing to sell or swap gift cards for business-to-business programs at less than face value.

A corollary of the maturing gift card market in North America has been the creation of a new industry, the third party data handling companies that have increasingly become turnkey sources for most aspects of gift card program operations. These companies handle all record keeping and account transaction details. They usually set up the networks over which data is handled and they also handle inventory matters, ensuring that all stores are adequately stocked with the various gift card products. Unlike credit cards that involve typical transaction costs of 1.5%, a gift card’s cost per transaction (i.e. redemptions, activation, or recharges) is generally US$0.05. This has meant that most retailers, who can all be assumed to have sophisticated IT expertise in-house, nonetheless have found it far easier and cost-effective to farm out the management of gift card programs to these data handling services. In turn, this has meant that the overall management of gift card programs, basically designing and implementing store-wide marketing initiatives for gift card products, is often handled by a single senior level marketing executive even in very large retail companies. Printers, plastics decorators and card manufacturers with fairly developed gift card manufacturing niches sometimes have little direct contact with these gift card program managers at the retail level, but instead are dealing with third party intermediaries who act as de facto gift card manufacturing brokers.

From the aforementioned account of North American gift card market dynamics there are several conclusions one can draw about potential for duplication of this phenomenon abroad. First, even if gift card markets in different regions grow to be only a fraction of what exists in North America, it would still represent quite a large opportunity, e.g. on the order of several million cards per annum and billions of Euros per annum. Second, gift cards elsewhere are likely to similarly take on importance as advertising media, as they have in North America. That means that cosmetics are all important, as is novelty in design. Equipment and tooling with the needed versatility to accommodate this desire for unique design and packaging therefore is likely to be as important elsewhere as it is in North America. Third, as gift card markets mature the variety of gift card products offered by major North American retailers multiplies and their product lifecycles become shorter, such that production line efficiency with shorter runs increasingly defines which companies are more competitive in the gift card manufacturing niche. Fourth, the desire for unique packaging for gift card products also gives a competitive advantage to companies that have ability to do turnkey card plus packaging in-house or who can best create working partnerships to deliver similar total packages to the retail customer or their third party intermediaries. Fifth, the third party data handling companies that specialize in the gift card niche can be expected to help grow interest in gift card merchandising programs as they expand globally. In fact, two of the larger U.S. companies of this type have recently set up shop in Europe with this very intent.

Equipment for Gift Card Manufacture

By some estimates, the total cost of entry for the gift card manufacturing market could be about US$500,000.00 for plastics printing companies, which is not a significant deterrent for those that are already accustomed to high costs of sophisticated printing presses or the like. This also speaks to the potential for gift card manufacturing services to become as competitive as the increasingly price-driven financial card manufacturing has become in recent years.

However, most players in the North American gift card market already had made the needed investments in equipment – e.g. printing presses, high precision optically-registered die cutting equipment, laminators, etc. – before they developed a gift card niche. These companies had been using this equipment to manufacture other products and in many cases continue to do so. For example, there are many similarly highly profitable fast growing U.S. market niches (refrigerator magnets, specialty advertising products, gaskets, loyalty cards, hangtags, etc.) that rely on the high precision steel rule die cutting systems commonly used for gift card manufacture and there are several highly profitable companies selling gift card manufacturing services whose broader specialty can be defined as expertise in steel rule die cut products. Printing equipment and processes need to be able to handle plastic substrates. Most gift cards use magnetic stripes to encode data, which requires the types of personalization equipment already in use by financial card manufacturing companies. However there is no absolute requirement for cards to store data in this way and some major U.S. retailers rely on simpler bar coding to store data.

To date, the great range of gift card designs have nonetheless been limited to those that create wallet-sized cards. This probably has most to do with retailers’ desires to have gift cards easily accessible to consumers and to function as portable mini-billboards. Many gift cards do look like credit cards dimension-wise, but actually are rarely held to the same exacting ISO standards. Corner radius of these cards might vary, for example. This is because gift cards only need to be read by one type of card reader, usually a swipe type, ultimately affording designers much more latitude in card dimensions and designs.

Another common denominator of gift card manufacturing is that all designs require die cutting capabilities. The better systems that deliver cut-to-print registration accuracy of +/- 0.1 mm are usually required for the varying shapes of gift card offerings. The versatility of die cutting systems to handle changing shapes and dimensions of gift card products has had great impact on gift card manufacturers staying power in the market. Those with the more flexible modular designed die cutting equipment that can interchange sheet with roll fed or interchange different types of dies and different modes of parts extraction have enabled many gift card manufacturers to evolve as the market has required. Currently, for example, the so-called “sombrero” card is becoming a very popular design. These are rack cards that have a score line for a break-off ISO CR80-sized card held within a point-of-sale carrier that has a broad somewhat triangular slot knockout for the card hanger that makes it easy to get off a hook. (Note: its “sombrero” nickname comes from its similar shape to that of a hat.)

It’s axiomatic to say that those companies with better operating efficiencies tend to become the most competitive in the marketplace. However, this point cannot be overemphasized when speaking of gift card manufacture, given that gift cards function as retail products where as little as 0.5% of margin will be considered a deal maker or breaker to the retail buyer. This is one reason why gift card manufacturers that have invested in automated inspection technology have been able to gain competitive advantages. These companies are better able to deliver the cosmetic qualities required with better production efficiencies. However, not all automated inspection systems offered in the marketplace have proven capable of adapting to the gift card products. The best-in-class automated inspection systems can fully inspect both sides of typical gift cards at the rate of 36,000 cards/hour. These better inspection systems also use the type of open system design that can adapt to non-standard card dimensions (e.g. double CR80 “sombrero” designs) and special features such as bar codes and UV feature inspection.

Proficiency with shorter runs is the specific type of production capabilities most required from equipment and operating procedures. Any and all equipment features that facilitate shorter runs help give gift card manufacturers a competitive advantage. There are a host of equipment features to consider in this light. For example, some steel rule die cutting systems automatically reposition dies for rapid job changeovers. Modularly designed die cutting systems allow interchange of hard tooling or steel rule dies within minutes, while other equipment configurations are fixed and inflexible. Some automated inspection systems are smart systems that can quickly train on “good” cards, bypassing time-consuming programming during job setups. Some automated inspection systems can fully inspect multiple features in a single pass, while less sophisticated systems require slower multiple runs or combination with hand inspections.

Tooling Decisions for Gift Card Die Cutting

Tooling choices have great bearing on the success that gift card manufacturers have in meeting market demand for unique shapes and designs and doing so with maximum efficiency. There are five types of tooling that the better equipped are usually called upon to use – 1) steel rule dies, 2) standard male/female hard tooling, 3) progressive dies, 4) compound dies, and 5) modular dies. Gift card manufacturers that are not equally versed in these different types of tooling or that use die cutting equipment unable to accommodate these various types of dies are at a competitive disadvantage.

Steel rule dies have the advantages of being relatively inexpensive and easy to obtain quickly. A steel rule die generally costs 95% less than a standard blanking tool. In the better optically-registered gap presses that automatically re-position steel rule dies in proper position they also afford the rapid job changeovers that are important to the short run niche. One can make all of the features used in gift card designs to date— hole punches, score lines, perimeter cuts—but with far lower mechanical accuracy than would be possible with other types of tooling. This is due to the tendency of cutting blades to bend or deflect while cutting. While the cutting boards are usually engineered quite precisely, the blades are usually unstable and not as repeatable. Picture trying to use a thin blade to cut cheese. Card manufacturers familiar with the financial card industry usually have little experience with steel rule dies as they are not up to the rigors of strict ISO standards for CR80 dimension cards. However, steel rule dies are often the tooling of choice for less demanding gift card designs and mastering their manufacture and use is an important part of being competitive in the gift card manufacturing niche.

But steel rule dies are not the only die option or even the preferred option for many gift card jobs. The primary reason is their relatively short lifecycle. The best steel rule dies can be expected to cycle 150,000 times but in most cases it is less than 50,000. This is why one or another type of hard tooling is generally considered.

Male/female hard tooling can easily create gift cards that do not have internal features such as score lines or internal holes that are common in gift card designs. With these type tools, the key technical consideration is the clearance between the punch and die and how far it penetrates into the die cavity. When one is cutting thick materials typically used in gift cards (e.g. 0.76 mm plastics there is a need for considerable clearance between the punch and the die. In most case, the punch should be smaller than the die cavity hole diameters by as much as 1/10 the plastic material thickness. However, this general rule nearly always needs fine tuning and the more experienced die cutting equipment manufactures will make adjustments in tooling design as a matter of course. Scoring or perforating similarly requires a knowledgebase on how to correlate the thickness of the blade and the angle of the knife with the desired cut line. Generally speaking, the sharpness of the knifepoint and the speed with which the tool is cycled will affect end results, as is the spacing of the teeth on the perforating knife. The type of punch presses used for the more complicated cutting patterns of gift cards also has bearing. Presses in excess of 27,000 kg are generally required to get the stability and horsepower needed to control perforating and scoring operations.
Progressive dies are essentially two or more tools built side-by-side that create all the cuts, internal holes, score lines, and perforations used in gift card designs in multiple sequential cutting stations. Here too the knowledgebase of the gift card manufacturer in important, especially when it comes to considering tool progression (center-to-center spacing between two stations in a tool). Progressive tools must be very accurately built to match the step up and artwork must be similarly matched to this dimension in the printing. Progressive dies cost about 50% more than ordinary male/female hard tools. Many experienced users of progressive dies design the heights of different tool elements to turn different features on or off and thereby gain multiple uses for the die with different artwork patterns. This type of flexibility has proven very important to meet the demand for variety in gift card products.

Progressive dies can be troublesome in that printing must precisely match tool dimensions or station-to-station positioning will be off and quality will be compromised. If there are cut-to-print registration problems a progressive die will multiply the rejects. They are also inherently slower because they involve cycling through multiple stations. For these reasons compound dies have come into use. Compound dies are essentially two or more tools built inside each other such that the gift card (including all its internal features and the die cut features of carrier for point-of-sale displays) can be created in one press stroke. These type dies have unsurpassed mechanical accuracy in a fast single step process. But one pays for this accuracy and throughput—generally at a 150% greater cost of a standard male/female die. They also are return-to-web dies, like steel rule dies, and those gift card manufacturers that have equipment with greater versatility in parts extraction and knockout systems have a distinct advantage.

The need to produce high quality prototypes in competitive bid situations and to find tooling for moderate run lengths has led to the value of the new modular dies largely created for gift card products (and their similar loyalty card products that are also popular in the United States.) These moderately-priced dies create the same edge quality produced by hard tooling but at approximately 1/5 the upfront cost of hard tools and obtained in as little as 1/8 the time it takes to procure hoard tooling up to the requirements of many gift card designs. These are often the tooling of choice for many gift card jobs with run lengths less than 500,000 die cutting cycles.

Actually, most of the successful North American gift card manufacturers built their tooling selection and deployment knowledgebase with a good deal of help from manufacturers of high precision die cutting equipment. These same free consultations are available on a global basis.

Weighing Competition

It follows from the above discussion of equipment and tooling requirements that those companies with pre-existing proficiency in one or more processes needed for gift card manufacture will have distinct competitive advantages in capturing this market opportunity as it sweeps the globe. In North America, the leading companies now established in gift card niches were largely drawn from the ranks of plastics printers, printers of specialty advertising products, and card manufacturers. Each of these type companies has particular advantages and disadvantages to consider.

Card manufacturers, most of which began in the financial card arena, have gravitated to gift card products in reaction to the increasing competitiveness in thin margin financial cards. These type companies often have most or all of the equipment needed for gift card manufacture– printing presses, laminators, optically-registered high precision die cutting systems, and often automated card inspection systems. However, the models of equipment they use are more or less adaptable to gift card manufacturing requirements based on how open their designs are. Card manufacturers with non-modular designed card punching systems often have to start from scratch and acquire new die cutting systems better configured for gift card requirements. Similarly, automated card inspection systems that are unable to adapt to non-CR80 card dimensions are not matched to popular gift card design requirements. The main disadvantage for financial card manufacturers or ID card manufacturers however is their investments in the relatively expensive secure facilities and processes required for financial card production. That encumbers them with an overhead that smaller companies outside secure card niches do not have.

Familiarity with the interplay of inks and plastics is a strong competitive advantage. All companies that have well-established in-house expertise in plastics printing have strong potential to be successful in this market. This is especially the case when one considers that the die cutting system needed to complement this capability only costs about US$200,000.Training in operating these die cutting systems is relatively straightforward, usually completed in 3 days of initial system setups.

Printers that have the ability to provide turnkey solutions— both cards and packaging—have a distinct competitive advantage. In North America where the maturing gift card market is spawning greater variety in gift card packaging designs, those printing operations with the most versatile finishing departments have a competitive edge. For example, companies that have added laser die cutting systems to their repertoire are seemingly limitless in meeting retailers’ need for unique gift card designs and packaging.

Summary

The gift card market grew very rapidly in North America in the last decade. Many companies across the globe are already well equipped to capture this market as it moves to their geographic region. Many others will be able to enter the market with only modest investments in additional equipment.

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Tom Kleeman is CEO of Spartanics (www.spartanics.com), which engineers and manufactures a range of automated equipment for die cutting, laser cutting, inspection, punching, screen printing and counting used by global printers, card manufacturers, plastics decorators, specialty advertising printers, among others finishing flat stock material. Its worldwide organization maintains offices in the United States and Germany.