Gift Card Arbitrage

GiftRocket has this interesting post examining what the average secondary resale value of a $100 gift card is.

Apparently there's quite a spread. At whole foods, the value is $91. At 1-800-Flowers, it's as low as $50. The average resale value is $72.

So here's the question - what should they be trading at?

Well obviously the upper bound is $100, as cash weakly dominates a gift card for all consumers. (The logic is that if I gave you $100 and you would like to spend it all at Starbucks, you would be indifferent between the cash and a Starbucks Gift Card. If you were going to spend even some of it elsewhere, you'd prefer the cash).

The standard explanation for a discount is shipping/hassle costs. If it costs me $2 to get it sent to me, and $5 of time to hassle around on E*Bay, I'm only going to pay $93. But this doesn't explain why there's such a big spread across retailers. The shipping costs are the same for all cards. And even the estimated cost of people's time doesn't make sense - people who shop at Whole Foods (value = $91) will probably have a higher cost of their time than people who shop at Baja Fresh (value = $70), in which case the price patterns should be reversed.

Another potential reason for the existence of a discount is the estimated probability that the card is fraudulent. But unless some stores are easier to scam than others, it's not clear how you end up with a cross-section of prices.

GiftRocket notes that the discount is related to how popular the merchant is - popular stores trade at a lower discount.

So what's the profitable trade here? The real question is why people who aren't planning a big purchase at one of these stores anyway don't stock up on gift cards. Doing so is getting you a 50% discount on flowers! I guess most people don't think to do this trade.

My guess is that it's also related to the length of time it will take you to spend the money. The two highest are a supermarket (Whole Foods) and a giant retailer (Walmart), where people might conceivably spend the money in one or two weeks. Next is Starbucks, which is also likely to be bought fairly frequently. But it will probably take most people quite a while to buy $100 worth of burritos. And as for flowers, if you weren't buying $100 of them at once, it could be a long time before you spend the rest.

Either way, I may look into this next time I'm thinking of buying at one of these places.