International Law

What is in a National Gift Card Program?

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QSR reports about a new gift card program

"Rocky Mountain Chocolate Factory (RMCF) is now implementing a national gift card program with optional credit/debit processing from integrated payments processor, Mercury Payment Systems.

Mercury's recent technology integration to Retail Anywhere POS allowed RMCF franchisees to process card payments directly through their POS system, eliminating the need for third-party processing software and support.

RMCF franchisees can choose to implement just the MercuryGift card program or combine it with Mercury's credit/debit processing. Those who process all payments with Mercury save with free, unlimited MercuryGift transactions and card balance inquiries."

Why do franchisors offer national gift card systems? One word: breakage.

"The National Retail Federation said 2006 holiday sales (those occurring in November and December) of gift cards were $27.8 billion. Overall holiday sales were $663 billion, according to the U.S. Commerce Department.

Independent financial services research firms have estimated holiday gift card sales were as much as $75 billion. In fact, no one really knows the aggregate effect of gift card transactions because retailers rarely provide separate information on gift card sales and redemptions.

The accounting for gift card sales presents an emerging reporting dilemma for retailers.

Unresolved issues stemming from the reporting treatment of gift card sales and "breakage" (gift cards that consumers fail to redeem) potentially encroach upon several accounting regulations, including standards for revenue recognition and the recognition of special items.

In practice, the reporting of gift card sales and breakage among retailers varies significantly and it is unclear what future action, if any, standard-setters and regulators will take toward unifying the range of practices."

When reviewing the franchisor's financial statements, it is important to get a handle on how the franchisor is treating the reporting of breakage, some franchise systems simply treat the forecasted breakage as today's revenue. You don't want to do business with people who engage in this sleight of hand.

Full post as published by Misleading Advertising Law on December 01, 2008 (boomark / email).