The restaurant gift card market is probably bigger than $5B dollars a year. According to the National Restaurant Association, 2011 total restaurant spending is forecast to total $604 billion, roughly 6% of aggregate U.S. consumer spending. We conservatively estimate, using this proportion, that the size of the restaurant gift card industry is at or over $4.8 billion per year.
What $5B means
Looking at this data from the restaurant owner’s perspective is even more striking. According to the NPD Group, there were approximately 580,000 restaurants in the U.S. at the start of 2011. The $4.8 billion estimated restaurant gift card industry works out to $8,275 in average gift card income every year at the nation’s restaurants. Compare that to NASA’s $3.7B Space Exploration budget. While restaurant gift card spending is not likely to be evenly distributed across all restaurants, it is a safe assumption that gift card programs play an important role at most of them.
Anecdotally, a longtime restaurant industry insider recently relayed to me the story of his first job in the business, for a small Italian restaurant in Maine. He said that the gift cards the restaurant sold during the Christmas holidays generated enough cash flow to get the restaurant through the tough winter months. At the other end of the spectrum, the nation’s top restaurants sell hundreds of thousands of dollars of gift cards each year.
The pros and cons of gift card programs
There are lots of reasons to have gift cards. It is almost inexcusable as a restaurant owner to not have one.
- Revenue. Since the gift cards are all pre-paid, the restaurants get immediate revenue.
- Breakage. Not all gift cards are completely or even partially redeemed – estimates of the amount of gift card “breakage” are around 25%, so restaurants pocket roughly 25% of the value of each gift card without having to give anything of value in return.
- New customers. Gift cards drive customer traffic to specific restaurants – potentially leading to new customer acquisition.
But gift card programs have costs too.
- Significant staff investment. It takes time and effort to create, process, sell gift cards, not to mention maintaining proper redemption records.
- Logistical drawbacks For smaller restaurants, customers often just won’t buy if it isn’t convenient for them to do so online. Look at this disaster of a gift certificate form at Gary Danko San Francisco.
The way that customers interact with restaurants and other businesses is changing dramatically. More customers want to interact with businesses by “checking in” when they are there using services like foursquare and Facebook Places – foursquare grew by 3,400% in 2010, as users checked in over 381 million times.
These customers also want to share their restaurant experiences by posting on their Facebook walls, tweeting, or writing Yelp reviews. Restaurants have generally been slow to respond in kind to this new demand from their customers, as few restaurants put significant effort into interacting with their customers through social media such as Facebook and Twitter. The gift certificate has remained simple and unchanged, but will it stay so for much longer?
We published a version of this article in Restaurants & Institutions Magazine. Below are some notes on market sizing:
- Total dollar value of gift cards given out in the U.S. every year: $80 billion
- Total dollar amount spent at restaurants in the U.S. every year: $604 billion (according to the National Restaurant Association)
- 2010 U.S. aggregate GDP: $14.7 trillion
- Consumer spending’s proportion of aggregate GDP (remember C + I + G + Xn?): 70%
- 2010 U.S. consumer spending: 70% of $14.7 trillion, or $10 trillion
- Percentage of consumer spending that is on restaurants: $604 billion / $10 trillion = 6%
- Applying the same percentage to the total dollar value of gift cards given out, we get our estimate for the restaurant gift card market: 6% of $80 billion = $4.8 billion. Note: the $80B is a conservative estimate of current gift card spend.
- This number is probably a conservative estimate, as housing is a third of consumer spending.