Facebook Continues Investment in Gifting Strategy

Navigator Edition: April 2013
By: John Grund and Allison Brenner

Recently, social media giant Facebook launched the Facebook Card – its branded, reusable gift card that is able to store value for multiple retailers. The four launch partners were Target, Sephora, Olive Garden, and Jamba Juice. Subsequently, Staples, Outback Steak House, Burger King and Walgreens have also become Facebook Card partners. The gift card launch is one of several moves where Facebook is attempting to commercialize its vast social media network and gifting is clearly on their radar screen. Given the communal and interactive nature of the network coupled with its rich information, it is easy to see how gifting in its many forms (e.g., holidays, weddings, incentives, etc) would be a priority.

Facebook has pursued the gifting market for some time as one of its first moves was just in time for Valentine’s Day in 2007 when the Gift Shop was launched. It originally allowed users to send virtual gifts to other users on the network. This service was suspended by 2010 as focus appeared to shift to the development of Facebook Credits, a virtual currency for games and applications. Facebook Credits phased out in 2012 and game developers were required to accept payments in local currency. The launch of the present iteration of Facebook Gifts followed and gave rise to the new Facebook Card.

The acquisition of mobile app Karma in May 2012 appears to have been an important component for the creation of Facebook Gifts. Karma is a gift giving app and was further evidence of Facebook’s interest in gifting. Facebook leveraged Karma to create Facebook Gifts. This Facebook-embedded application allows users to send digital gift cards online or real gifts via mail. A new feature allows recipients to choose a gift. It is fully integrated into the Facebook interface. Facebook Gifts began a slow rollout to select U.S. users in September 2012 and added more users as the holidays approached. By December 2012, a full-scale rollout was completed for all U.S. users. Today, additional countries such as India, Canada, and the U.K. are being added, but those users can currently only send gifts to U.S. recipients. Major partners include Starbucks, iTunes, Uber, and Gund; merchandise is mainly focused on price points below $50. The Facebook Card, an add-on to Facebook Gifts, was announced in January 2013.

The Facebook Card is a physical gift card that can store balances for multiple retailers. Although the initial subset of partners is limited, we expect the number of partnerships to grow if this first wave of partners enjoys success. Discover Financial Services has partnered with Facebook to process the Facebook Card transactions. This product launch creates a new means for retailers to leverage Facebook as a prepaid gifting platform. Many retailers have dabbled in offering gift cards through their own Facebook fan pages, but that tactic is believed to have yielded mixed results. There are also several third party gifting providers that use Facebook as a springboard for business. Swedish-based Wrapp, a gifting app provider that is available in the U.S., recently disclosed that over 1 million digital gift cards had been redeemed by Facebook users. Wrapp automatically connects users to Facebook allowing them to select gift cards for their friends.

As would be expected at this time, Facebook Gifts is not a significant revenue generator for the company. Payments and Other Fees accounted for approximately 16% of total annual revenue or $810 million in 2012 (the rest is advertising); gifts was a very small fraction of this revenue (<$5 million). The gifting product is still in its nascent stages with management trying to “figure out what the right product is” and expecting revenues from this segment to remain “very small” for 2013 (Q4 2012 Earnings Call).  However, it is very apparent that management is investing in gifting, but this will be a matter of testing and learning for both Facebook and its retail partners. Factors such as customer engagement/experience, adoption, sensitivity concerns, scalability, and sales vs. margin trade-offs are just a few of the areas that will be monitored and fine-tuned.  Ironically, the market had many similar concerns before gift cards became mainstream and certainly in the early days of third party distribution via grocers and drug stores.  At this stage, the real value lies more in the learning than in the number of cards sold as players define and refine their digital strategies in social media, mobile, third party distribution, etc. You would be hard pressed to find a better test bed than Facebook.

Sources: Facebook Investor Relations, Quarterly Earnings Presentations, Company Websites, Company Press Releases, TechCrunch, thinkdigit.com, First Annapolis Consulting Analysis.

For more information, please contact John Grund, john.grund@firstannapolis.com; or Allison Brenner, allison.brenner@firstannapolis.com.

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