Circuit City's Gift Card Redux!

Earlier this year, we heard lots about gift cards when Sharper Image went into bankruptcy. In the end, customers only partially lost out: to use a gift card they had to make double the purchase. So, a gift card for $50 could be used on a purchase of $100 or more.

Today, Circuit City, one of my favorite stores for customer service and service plans, filed for Chapter 11 bankruptcy. Of course, many consumers own gift cards for Circuit City and other troubled retailers. Gift cards may look like everything else in our wallets, but are not. Gift cards are really just unsecured debt. The consumer gives Circuit City money in exchange for the gift card, which is merely a promise to supply goods later. The consumer is just an unsecure debtor of Circuit City, which means if the company goes bankrupt the consumer may lose out. Circuit City has asked the Bankruptcy Court for permission to honor the gift cards. With the holidays looming ahead, gift card sales can be an important sales tool for a retailer whose customers want the chance to take advantage of after holiday sales by purchasing gift cards for loved ones. Circuit City's bankruptcy should remind consumers of the fragile state of gift cards at a time when credit is already tight. Consumer's desire for low cost gifts for family will be pitted against the risk of company failure that might make a gift worthless. Cash, as impersonal as it is, may win out over gift cards this year. Let's add to the many things needing attention is some protection for consumers who are lending to companies through the use of gift cards.

On a broader note, history shows that unless the credit markets unfreeze, consumer confidence is restored and consumers have money to spend, we will see more like this. The past week has revealed to us:

• U.S. auto makers on the brink of failure with GM stock trading at 60 year lows,
• more money needed for the AIG bailout (now at $150 billion),
• Amex becoming a bank holding company to better weather volatility and gain access to bailout funds,
• Bank of America announcing that it is assuming $16.6 billion of Country Wide's debt as part of its purchase of the troubled lender,
• Fannie Mae lost $29 billion this quarter,
• Google stock down 55% this year, and
• Starbuck's, my favorite home of the perfect coffee, reported weak earnings and will close some stores.

I could go on with more, but the point is that it is a tough world out there right now. The bailout needs more time to take hold, but for now we all better hang on for more bad news.

— JSM