Paper gift certificates have long been a popular show of appreciation. But according to a report in the Dayton Business Journal, plastic gift cards—reloadable, wallet-size sales-driving wonders—likely will replace them soon.

This year alone, U.S. retailers expect to get $45 billion in sales via gift cards, making the "paper or plastic" question a foregone conclusion.

Hoping to phase out paper gift certificates programs, Pizza Hut and Papa John's launched gift card programs this fall.

Julie Hildebrand, a spokesperson for Dallas-based Pizza Hut, said migrating to cards was a natural for consumers used to carrying credit cards. "The gift certificates we had were more envelope size, like a paper check. So the size and portability of the cards are nice."

So is their sales potential. According to an independent survey commissioned by Stored Value Systems (SVS),

What's Important

Pizza operators are phasing out gift certificates and replacing them with higher-tech, plastic gift cards.

Surveys show that gift card users typically spend over and above the amount of the card gifted, and they often become loyal customers of the business where the card is redeemed.

Gift card programs are now affordable for independent operators.

a gift card supplier and electronic transactions manager, 53 percent of gift card recipients spend more than the card's value when redeemed at the retailer. As a result of receiving a gift card, 15 percent of gift card recipients become loyal customers of the company where they redeem the card. Additionally, almost 50 percent of gift card users load between $20-$29 on cards they give to others.

A key advantage of gift cards over gift certificates is convenience. As Hildebrand pointed out, they're great "to leave behind with the babysitter instead of cash or check" because parents can control the children's purchase by loading a set amount on the card. (A delivery driver's tip can be deducted from the card, and Papa John's will even deliver cards to customers' doors.) When that balance is used up, it can be reloaded again.

Unlike losing a gift certificate, which is much like losing cash, if a magnetic-strip gift card is lost or stolen, customers can cancel the card and have a new one issued, along with any remaining funds on the first card.

How they work

Advances in POS systems have the rapid move from paper to plastic gift cards in the pizza business. According to Mike Brewer, communications manager for SVS, not only are large chains switching from paper to plastic, independent operators now can afford to use gift card systems as well.

Gift card providers can program most POS systems to read gift cards, or operators can use a standalone card-reading terminal that can be integrated into a pizzeria's POS. An even simpler solution includes programming a pizzeria's standard credit card-reader terminals to do the job.

"In the case of an independent pizza operator, we can actually produce a private-label gift-card off the shelf and implement that system in a matter of weeks," said Brewer. "It used to take months and it's much more affordable than it used to be."

But is it comparably affordable to paper gift certificates? That's difficult to say, given the cost nuances of every gift-card program. Some providers, like SVS, make some of their money on the sale of the cards to retailers, but the bulk of their revenue comes from transaction fees charged to the operator each time a gift card is swiped for redemption.

Neither Pizza Hut's Hildebrand nor Papa John's Sherman could divulge the details of their companies' programs, but they said fee-based transactions were part of their provider agreements.

The Dayton Business Journal report estimated the cost ranges from $1 to $3 per card, depending on the "type of plastic used and the type of scanning surface—magnetic strip or radio frequency."

Still, even that estimate doesn't account for long-term use of a card that's reloaded and depleted multiple times.

Brewer said SVS's transaction fees are assessed "on a sliding scale" relative to transaction volume, but that doesn't mean super-high sales volume is necessary to make a gift card program affordable. "We have to meet the economic needs of the small restaurant owner, too, so we address that appropriately," he added.

Win-win proposition

Simplifying customers' pizza purchases was Papa John's chief aim for switching to gift cards, Sherman said. For example, regardless of where a customer buys his "Papa Card," he can use it at any Papa John's unit nationwide—even for Internet purchases.

Convincing operators it would help them, however, took a little effort.

"They wanted to know whether it would complicate the existing system," Sherman said. "They understood that it's a change everyone needs to get used to for the customers' benefit. And so far, it's been well received by the customer and our (operators.)"

Papa John's operators also wanted to know how they'd get funds due them when cards they sold were redeemed at other locations.

SVS addressed the issue with what the company calls its "Franchisee Friendly" funds settlement system. If a Papa Card is bought in Kentucky but redeemed in Pennsylvania, Brewer explained, SVS's automated system coordinates, via ACH, a real-time transfer of money from one operator's bank account to the other's.

The transaction is similarly seamless for the customer, since the card is debited at the point of purchase.

Papa Cards are available systemwide, and Pizza Hut is moving toward that participation level as well, said, Hildebrand.

"All our corporate stores are using them, and then we do have most of the franchisees involved, but it's not 100 percent yet."

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