Everyone likes gift cards. The most popular?
Gift cards make for great presents as its much more thoughtful than handing someone cash. Gift cards are also good business for retailers. Retailers like the high margins on cards that take up little selling space. The numbers always differ but for every $100, $92 goes to the content provider, $5-6 goes to the retailer and $2-3 they keep. HAWK collects payments from the retailers and then pays the money to content owners holding on average a weeks float of cash. Agreements with retailers typically last for three to five years. It is big business with recent growth driven by international (growing 3x time faster than domestic) and corporate reward programs. The most popular gift card is iTunes.
HAWKS own gift? A spin off
HAWK was created within Safeway. It has grown so much over the years that Safeway now represents only 16% of sales. HAWK is at the stage where it needs to be independent as many retailers like Wal Mart in the US and ASDA in Europe were not keen to do business with an entity that was owned by a competitor. The spin off also allows HAWK to use its own script for acquisitions. See the spin off benefits below. There is also a massive tax benefit for shareholders as post spin-off Albertsons has bid for Safeway. If the transaction goes through Albertsons will assume the corporate tax of the distribution. HAWK shareholders will receive the present value of $4.50 a share in tax savings.
Much like the Visa and Mastercard networks it is hard to build a network. HAWK has connected 100,000 retail distributors and 600 gift card owners. HAWK estimates that they have spent $100m to build the network. New entrants will need a sales force to connect everyone (HAWK has retailers tied up in contracts) and spend $100 million on a settlement engine and accounting. In addition they have to convince retailers to drop HAWK cards, remove the aisle fittings and right off the remaining cards which is disruptive for the retailer when HAWK is growing the category 20%. Its a tough task for a retailer to commit to. HAWK has only lost one distributor in their top 50 accounts since inception.
Digital gift cards like digital birthday cards
The main question is digital which is 3% of their sales. Will digital gift cards kill the business? It is possible but its most likely physical gift cards will still be important like physical birthday cards. No one sends electronic birthday cards, it does not show much thought or effort as a gift. I know I would prefer a physical gift card than an electronic one.
Jason
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
