Restaurant companies nationwide are examining their gift card programs in the wake of the Federal Trade Commission’s pending settlement with Darden Restaurant Inc., revealed this month, over its allegedly improper disclosures of “dormancy” fees.
The fast-growing and lucrative gift card business, which has spread to scores of chains, also was receiving scrutiny at the state and federal levels, including a bill in Florida’s Legislature to ban such fees.
Sales of gift cards—$80 billion last year alone—have burgeoned in all retail sectors, and restaurants have accounted for a sizable portion of that business, marketing experts said.
Starbucks Coffee, for example, has sold more than 115 million gift cards since introducing them in 2001. The chain issued 20 million, carrying about $300 million in value, in the last quarter of 2006 alone, for an increase of about 30 percent over card sales in the same quarter a year before. McDonald’s launched its Arch Card in December 2005 and reportedly sold $40 million worth in the first month.
By some estimates, fully 10 percent of the value on all gift cards will never be redeemed, and with redemption of much of the other 90 percent sometimes deferred for long periods, card sellers often are left to manage substantial gift revenues in their treasuries.
But standing out as a potential risk for foodservice operators was the FTC’s threatened $31 million sanction against Darden last year over its gift card policies. The parent of Olive Garden, Red Lobster and other chains had not adequately disclosed that $1.50 per month was deducted after 15 months of inactivity on cards sold before February 2004 and after 24 months on cards sold thereafter, the FTC contended.
In some cases those fine-print fee assessments were said to have rendered cards worthless when unsuspecting holders attempted to redeem them.
Bob McAdam, Darden’s senior vice president of corporate affairs, said, “Gift card sales in the United States have grown from zero just 13 years ago to a multibillion-dollar business, accelerating the need for more direct and simpler gift card administration practices.”
Darden, whose chains also include Smokey Bones and Seasons 52, disclosed in a Securities and Exchange Commission filing last August that the FTC suggested it pay $31 million in monetary relief to settle fee disclosure matters. In its 2006 annual report, Darden reported more than $100 million in unredeemed gift card value and gift certificates.
The Orlando, Fla.-based company said it had stopped charging the dormancy fees last October and had voluntarily restored all such fees ever charged to gift cards sold through its program.
The consent agreement between the FTC and Darden is subject to a 30-day period for public comment. After that period, the agency’s five commissioners are to vote on whether to make it final.
“We never intended for these fees to be applied to cards that weren’t actually abandoned,” McAdam said. “And as our experience with administering a gift card program has grown, we found the fees were no longer necessary.”
As part of the settlement, the FTC requires Darden to “clearly and prominently” disclose any fees or expiration dates for its cards in the future. However, Darden has indicated it doesn’t plan to ever reimpose such fees.
The FTC reached a similar gift card settlement in March with the Kmart subsidiary of Sears Holding Corp., also over dormancy fees.
Lydia Parnes, director of the FTC’s Bureau of Consumer Protection, said: “When it comes to gift cards, issuers can’t gloss over key information. They must clearly and prominently disclose fees and restrictions.”
Darden launched its gift card program in 2001. “It’s very important to us, because it’s important to our guests,” said Mike Bernstein, a Darden spokesman. “Gift cards let guests give a dining experience in our restaurants.”
The T.G.I. Friday’s division of Carlson Restaurants Worldwide of Carrollton, Texas, said its gift cards have no expiration date, no dormancy fee, no processing fee or any hidden charges. The chain’s gift cards, available since 2003, “are traffic drivers and are considered very successful,” a spokesman said.
Researchers say shoppers not only enjoy using gift cards, but spend more when they are redeemed. Target stores found that customers spend an average of $43 when they shop with gift cards—$27 using the card and $16 from their own pockets.
A National Restaurant Association study of operators found that nearly half expected to get a large proportion of their sales from gift cards, and a Deloitte & Touche survey of consumers last fall indicated that a third planned to buy restaurant gift cards.
Quiznos Sub, the Denver-based chain, is one operator that still appears to charge a dormancy fee. If a Quiznos gift card is not used for 24 months, $1 a month is deducted until the card value drops to zero. Jessica Beffa, a Quiznos spokeswoman, said the company had made changes in its program in March to accommodate franchisees, but she was unsure what the company would be doing in the wake of the Darden-FTC settlement.
State legislators, meanwhile, are eyeing gift cards sales by companies in their jurisdictions.
Darden last month said it was supporting legislation in Florida that would ban gift card dormancy fees and expiration dates.
However, McAdam said, “when we did have these fees we fully disclosed them on the backs of our cards and other places and followed all federal and state disclosure guidelines.”
The Nevada Restaurant Association is opposing a bill in that state’s Legislature to require that unused gift card values help fund the state’s education programs. Assemblyman Ruben Kihuen, D-Las Vegas, introduced AB279, which would declare unused value of cards abandoned property available to the state either on their expiration date or if not used after three years.
Kihuen said unused gift card values are required by federal law to revert to the state where the card-issuing company is incorporated. But the value can go to a state where the card was bought if state law so requires, he added.
Of the $80 billion spent on gift cards nationally in 2006, Kihuen estimated, $8 billion would never be used.