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When the Sharper Image announced that it was suspending gift card redemption as it began its reorganization under Chapter 11 bankruptcy protection, it ignited a fuse that cast a cloud over gift cards, which have rapidly risen to the top of the holiday gift giving hit parade. Consumers bought $26.3 billion in gift cards over the past holiday season, according to the National Retail Federation.

Each year for the past several holiday seasons, consumers have ratcheted up not only their overall expenditure on gift cards, but also the per-card value. Consumers love to give and receive them, and retailers have little to complain about.

They get paid before the card is redeemed. Cards drive traffic after the season, giving stores another chance to grab additional sales or simply pocket the dollars left on the table by those who never redeem the cards.

The San Francisco-based Sharper Image has resumed redemption under certain conditions. Cards must be redeemed in full in a single transaction.

Furthermore, the company states in a press release, “customers must purchase an item that costs double the value of the gift card or merchandise certificate.” In other words, in order to redeem a $50 card, the customer must spend an additional $50 in the transaction. That’s probably not what the giver of the gift card had in mind.

Sharper Image was popular as a business gift card. It’s hard to imagine that, as a thank you, an organization would like to force its client to either spend money in order to obtain a gift or simply toss the gift in the wastebasket. There will also be fewer places to redeem Sharper Image cards, since the company plans to close 90, nearly half of its 184 stores.

Retail and restaurant bankruptcies this year are expected to reach the highest levels since 1991. An analyst at the New York City-based Tower Group has estimated that more than $75 million worth of gift cards are at risk from store and restaurant closings this year.

Asked about the potential effect of useless gift cards might have on consumers in a RetailWire discussion, Britt Beemer, chairman of Charlotte, NC-based America’s Research Group, said, “You will see a lot of frustration among customers. You basically stole . . . out of the customers’ pocket. They will never forgive you.”

“The failure of even one major gift card program at the consumer’s expense tars all other programs, regardless of their honorable intentions,” agreed James Tenser, principal of VSN Strategies, a consulting firm based in Tucson, AZ. “This episode is a setback for the entire concept. It moves gift cards into the category of risky securities –except they may never appreciate in value for the bearer, only decline.”

Lord & Taylor has determined that it will honor Fortunoff gift cards. Its parent, NRDC Equity Partners LLC, rescued the Fortunoff jewelry and home furnishings chain and plans to expand it, primarily within Lord & Taylor units.

Meanwhile, opportunity knocked for Brookstone Inc., the Merrimack, NH-based Sharper Image rival. On news that Sharper Image was suspending gift card redemption, it announced that it would exchange Sharper Image gift cards for 25% off any purchase.

In the short term: what’s the better deal? Pay a 100% premium at Sharper Image, or get a 25% discount at Brookstone? In the long term, has the blush come off the card? Will consumers begin hedging their bets and start shopping for actual gifts again?

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