Experts say buying gift cards will only 'go so far' unless the government steps in to save local businesses hurting from coronavirus-related closures
- With retailers closing up shop around the country to curb the spread of the coronavirus, consumers are being called to support small businesses by buying digital gift cards to ensure cash flow in the short term.
- However, experts said that while gift cards can provide immediate relief for fixed-cost expenses like rent and utilities, many will need significant governmental aid to stay afloat and pay their workers.
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As retailers around the country shut their doors to prevent the spread of the coronavirus, local business owners and celebrities alike are encouraging shoppers to purchase digital gift cards to help cushion the blow from the lack of physical sales.
However, some consumers are wondering just how helpful such efforts may be and how far they may actually go without further support. We talked to experts who said that while buying up gift cards from independent bookstores and corner bakeries can undoubtedly help bolster companies reeling in the wake of the coronavirus, survival will require much more aggressive measures from the government and beyond.
Gift cards 'can only get you so far'
According to Katrin Zimmermann, managing director of TLGG Consulting, gift cards and crowdfunding campaigns will serve as important tactics to help businesses pay for fixed costs like rent and utilities amid coronavirus-related closures. However, this will only serve as a short-term, band-aid solution, especially for small retailers with "small margins and high cash flow requirements," she said.
"In the long run however, these measures can only get you so far," she said. "Many businesses will need significant government support to survive this year."
Several people shared similar sentiments on Twitter this week, stating that the push to buy gift cards overlooks bigger-picture challenges, like long-term revenue recovery and the immediate impact on employees who are being laid off en masse around the country.
"On one hand, [gift cards do] have the benefit of accelerating cash flow into the business," said Jonathan Treiber, CEO of the offer management platform RevTrax. "However, if that cash is used to operate the business in the near-term, the business is exposed to cash flow issues once it resumes normal operations without a corresponding uptick in sales because they have to honor past gift card purchases and commitments."
Also complicating matters is the fact that many small businesses don't offer gift cards and thus can't use them as an alternative revenue stream, according to Shelley Hunter, a gift card expert at GiftCards.com. In these cases, she said consumers should consider alternative ways of supporting businesses, like using GrubHub or Seamless to order takeout from local restaurants.
"The best thing you can really do is shop the stores online, or if a local restaurant is close to you, a lot of them are doing curbside pickup," she said. "Ultimately the gift card is deferred revenue, but the influx of cash can help with the cash flow during this downtime."
Small business in a post-COVID-19 world
While Treiber said he believes most businesses "will return to normal, as will cash flow and profitability," he urged companies to be diligent in trimming the fat in order to stay operational once the coronavirus finally subsides in the US.
"Closed businesses need to focus first on cutting costs to stem the bleeding in the near-term - with any gift card sales viewed as a cushion or rainy-day fund - either to cover expenses in a prolonged shutdown or for when they return to full operations," he said. "Running out of cash during a rebound would be a very unfortunate predicament that businesses should do their best to avoid by conserving cash in the near-term."
Looking ahead, Hunter of GiftCards.com said that when business does resume, she foresees not only an influx of socially starved Americans ready to shop among the masses or buy dinner with friends, but also the propensity to spend more than usual while doing these activities. She cited a 2018 study on consumer gift card preferences, in which 59% of people surveyed spent more than the card's value.
"There's something about the concept of free money when you take a gift card to a store," she said. "You'll hear people say, 'I bought this skirt and it was really expensive, but I only spent a little bit because it felt like 50% off with my gift card.' We know consumers overspend the value of their gift card."
Zimmermann, the managing director of TLGG Consulting, advised companies to be prepared for the rush of business they may experience upon reopening. Small business owners in particular, she said, should opt to take steps to avoid becoming overwhelmed from heightened demand.
"A potential problem gift cards can create is a lot of customers wanting to redeem them once things go back to normal," she said. "Particularly in service businesses, this can lead to long wait times, and possibly bad online reviews, if not managed properly. Having a structured approach to this transition time is hence something business owners should already start thinking about now."