Cautious shoppers avoid gift cards

By Randy McClain, The Tennessean

On Wall Street, lawmakers are talking about how "toxic debt" threatens banks and lending. On Main Street and Lower Broadway, shoppers are beginning to fret about "toxic" gift cards from companies that could go bankrupt or close their doors without a trace.

Gift cards won't be worth the plastic they're printed on when that happens.

There's a new realization, including among Nashville-area consumers, that holding a gift card from a troubled retailer or struggling restaurant chain is like having a bank account without FDIC insurance.

It's not an idle worry. Consider local consumer Helen Primm Sanderson, who saw three gift cards worth a total of $50 go up in smoke when the Cooker restaurant, a family dining chain she frequented, closed on West End Avenue four years ago. A glum Sanderson has held onto the gift cards ever since because, well, they were a gift.

Or what about Barbara Kinser of Brentwood, who saw a $50 gift card meant for her husband become worthless when the Saltgrass Steakhouse on Westgate Circle in Brentwood closed recently.

"These restaurants are getting their money, but the customers aren't getting theirs," a disappointed Kinser said this week.

Kinser said she's sworn off giving relatives or friends gift cards this Christmas for fear that whatever shop she buys from might go out of business. "I am much more reluctant to give gift cards" with the economy suffering as much as it is, she said.

Shoppers spent an estimated $26.3 billion on gift cards at retailers last Christmas season, compared with $24.8 billion in 2006 and $18.5 billion in 2005, according to the National Retail Federation.

Gift-card holders could lose more than $75 million just from store and restaurant closings in 2008, said Brian Riley, senior analyst at Tower Group, a consulting company.

"The only way that number will change is up," Riley said.

Already some big retailers, including Sharper Image and Bombay Co., have filed for bankruptcy protection, leaving gift-card holders with millions of dollars of what the Bankruptcy Court considers unsecured debt. Both chains have since closed.

Some value negotiated

Consumers Union said that when Sharper Image filed for bankruptcy protection this year, it left an estimated $20 million on unused gift cards and maybe as much as $40 million when merchandise certificates and related promotional cards were included. At first Sharper Image said it would not honor the credits.

Later it successfully petitioned the court to allow it to accept gift cards if consumers spent twice the value of the gift card on a single transaction.

"That wasn't such a good deal, and who knows if anybody used their cards that way," said Anthony Giorgianni, associate editor of Consumer Reports, which is published by Consumers Union.

In August, home-furnishing retailer Bombay Co., which closed 388 stores, won approval from a U.S. bankruptcy judge to pay off gift card holders 25 cents on the dollar.

Protections proposed

Consumer groups are worried about how little shoppers are protected. Earlier this fall, a coalition of organizations asked the Federal Trade Commission to protect shoppers from losing money on gift cards when retailers file for bankruptcy protection.

It said retailers should be required to place money from gift card sales in a trust account that would be used to honor the cards if the merchants continued operations under the protection of a bankruptcy court.

Consumers Union, Consumers Federation of America, National Consumer Law Center and the advocacy group U.S. PIRG all support the proposal.

FTC spokesman Mitchell J. Katz said the agency had received the petition "and we are determining what our response will be."

Smaller shops close, too

Bruce Kent of Nashville said consumers are at risk not only from chain stores closing, but also from mom-and-pop shops that go bust or whose owners move on.

Kent said he won a gift basket at his daughter's elementary school fair this year, and it included a $50 gift card to Uncle Gio's Pizzeria & Restaurant on Nolensville Road. When that restaurant closed for remodeling, Kent bided his time. But when the restaurant reopened after a few months it had changed its name, had a new menu and presumably had new owners. "As a consumer, I didn't know where to go next," he said.

The bottom line is when a store or restaurant closes, consumers will be out of luck. That's why Consumers Union recommends that people think twice about giving gift cards this Christmas season.

"If you don't know what gift to buy, just give cash," Giorgianni said. "It's something that never expires."