1

December21,2016

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

1) ThegiftcardindustryachievedaCAGRof6.1%overthepastsixyears,surpassingthegrowthrateofapproximately3%–4%fortheretailindustryoverall.

2) Retailersgenerateadditionalsalesfromgiftcardsbeyondthefacevalueofthecards,asrecipientsspendanadditional38%,onaverage,whenredeeminggiftscards.Giftcardredemptionsoftendrivetraffictostoresandshoppingcenters.AccordingtoanInternationalCouncilofShoppingCenters(ICSC)survey,77%ofgiftcardrecipientsplannedtoredeemthegiftcardstheyreceivedduringthe2015holidayseasoninwholeorinpartatphysicalstores.

3) Thegiftcardresalemarketisestimatedtobeworth$1billion,andanumberofwebsitesspecializeingiftcardresale,whileothers—suchasCardpool,GiftCardGrannyandRaise—serveasgiftcardexchanges.

Gift Cards: An Opportunity for

Retailers to Generate

Incremental Sales Through Higher

Traffic

Deborah Weinswig

Managing Director,

Fung Global Retail & Technology

deborahweinswig@fung1937.com

US: 646.839.7017

HK: 852.6119.1779

CN: 86.186.1420.3016

2

December21,2016

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

GiftCardIndustryOverviewThegiftcardindustryachievedaCAGRof6.1%overthepastsixyears,surpassingthe3%–4%rateachievedbytheretailindustryoverall.In2015,theUSgenerated$129.7billioningiftcardtransactions,up6.3%yearoveryear.Thesalesfigureisontracktoreach$138billionin2016,accordingtoresearchconsultancyCEBTowerGroup.Closed-loopgiftcards,whichcanberedeemedonlyatdesignatedmerchants,accountforthemajorityofthemarket.

Figure1.USGiftCardIndustry:TotalSales(LeftAxis,USDBil.)andGrowthRate(RightAxis,%)

Source:CEBTowerGroup

Figure2.US:HolidaySeasonGiftCardSales(USDBil.)

Source:NationalRetailFederation/ProsperInsights&Analytics

99110 118 124 130 138

149160

0%

2%

4%

6%

8%

10%

12%

$0

$40

$80

$120

$160

$200

2011 2012 2013 2014 2015 2016E 2017E 2018E

TotalGibCardIndustrySize GrowthRate

$0

$5

$10

$15

$20

$25

$30

$35

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

In2015,theUSgenerated$129.7billioningiftcardtransactions,up6.3%yearoveryear.Thesalesfigureisontracktoreach$138billionin2016.

3

December21,2016

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

GiftCardsDriveSalesandTrafficforRetailersRetailersgenerateadditionalsalesfromgiftcardsbeyondthefacevalueofthecards.Onaverage,recipientsspend38%morethanagiftcard’sfacevaluewhenredeemingacard.Millennialsaremorelikelytopurchaseadditionalitemsthanotheragegroupsare:accordingtotheICSC,64%ofmillennialspickupadditionalitemseitherin-storeoronlinewhenredeemingagiftcard.

Themostcommonlypurchasedgiftcardsrangeinvaluefrom$21to$50.Whenrecipientsredeemagiftcardatadepartmentstoreorrestaurant,theytendtospendmorethanthecard’svalueinordertocoverthefullpurchase.

Giftcardredemptionsoftendrivetraffictostoresandshoppingcenters.AccordingtoanICSCsurvey,77%ofgiftcardrecipientsplannedtoredeemthegiftcardstheyreceivedduringthe2015holidayseasoninwholeorinpartatphysicalstores.Whenredeeminggiftcardsonline,31%ofrecipientschoosetopickuptheirpurchasein-storeaccordingtothesamesurvey.Evenunwantedgiftscardscandrivetraffictostores,asretailerssuchasGameStopandTargethavedesignatedkioskswhererecipientscancashouttheirunwantedcards.

RobustGiftCardResaleMarketItisestimatedthat$1billionworthgiftcardsgounused,andthishasresultedinanactivesecondarymarketforthecardsintheUS.ThereareanumberofwebsitesthatspecializeingiftcardresaleaswellassitessuchasCardpool,GiftCardGrannyandRaisethatserveasexchanges.Thesemarketplacesallowsellerstoexchangeunwantedgiftcardsforcash.Inthebestcases,sellerscanget$0.80–$0.90perdollarofgiftcardvalue,dependingonthedemandforthecard.

Figure3.SelectedGiftCardExchanges:AverageBuyerDiscountforSelectedRetailers’GiftCards

HomeDepot Walmart Starbucks Amazon Target

Raise 6.4% 4.0% 2.3% 1.0% 2.6%

CardHub 3.6% 1.8% 5.0% 1.4% 2.4%

CardCash 5.0% 2.5% 5.2% N/A 1.7%

AsofDecember9,2016Source:Companywebsites/FungGlobalRetail&Technology

Giftcardredemptionsoftendrivetraffictostoresandshoppingcenters.Giftcardredemptionsoftendrivetraffictostoresandshoppingcenters.AccordingtoanICSCsurvey,77%ofgiftcardrecipientsplannedtoredeemthegiftcardstheyreceivedduringthe2015holidayseasoninwholeorinpartatphysicalstores.

4

December21,2016

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

Figure4.CompanyGiftCardswiththeHighestResaleValue

Rank Company AverageResellValueper$100GiftCard

1 Nike $93.66

2 Walmart $83.94

3 BestBuy $83.12

4 Safeway $83.04

5 Costco $82.67

6 Target $81.88

7 Shell $81.87

8 Netflix $81.75

9 AppleStore $81.67

10 Ticketmaster $81.31

Average $83.49

Source:WalletHub

StartupsDriveInnovationintheGiftCardMarketAnumberofstartupsaretryingtoimprovethegiftingexperiencebymakinge-giftingpersonal,convenientandsocial.

LoopCommercehasestablishedpartnershipswithmajorretailerssuchasMacy’s,NeimanMarcus,SaksFifthAvenueandCoach.LoopCommercecreatedanalternativecheckouttechnologythatenablesshopperstoe-giftanitem(notjustacard)fromaretailer’sonlineproductselection.Itallowstherecipienttoeditthecolorandsizeofthatitembeforethegiftisshipped.Therecipientcanalsochoosetoexchangetheitembeforeitships.RoyErez,CofounderandCEOofLoopCommerce,notesthatmanyconsumersfeele-giftingisanimpersonalformofgivingthatdoesnoteffectivelycommunicatethethoughtandeffortthatwentintochoosingagift.LoopCommerceprovidesamorepersonale-giftalternativethatallowssenderstopickagiftfortherecipientwhilestillgivingtherecipientsomeflexibilitytofinalizethedetailsofthegift.

CashStarisanemergingB2Bmobilewalletsolutionthatintegratesandmanagese-giftcardsindigitalwalletssuchasApple’sPassbookandAndroidPay.CashStarworkswithmorethan300globalretailcompaniestoprovideaturnkeye-giftcardsolutionthatmakesiteasyforretailerstolaunchandoptimizetheirgiftcardofferings.OneofCashStar’srestaurantclients,Landry’s,sawasalesliftof33%initsonlinegiftcardsafterCashStarimprovedtheredemptionexperiencewithdigitalwallets.

CashStarisalsopartneringwithNordstromtolaunchapersonale-giftingservice.CustomerscanselectaproductasagiftfromNordstrom’ssiteandsendthegiftviaemail.Theemailincludesapersonalnotefromthegiverandarequestthattherecipientprovidedetailssuchassize,colorandshippingaddress.Iftherecipientdoesnotlikethegift,heorshecanexchangeitforadigitalgiftcardwithoutnotifyingthesender.

5

December21,2016

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

Giftlyisastartupthatmakestheexperienceofgivingopen-loopgiftcards(suchasVisaandAmericanExpresscards)morepersonalbyallowingthegivertosuggestplacesfortherecipienttousethecard;giverscansendapersonalsuggestionbasedontherecipient’slocation.Giftlyalsoenablesthegivertocustomizethegiftcarddesignusingoneofthehundredsoftemplatesprovidedonthewebsite.Intermsofdelivery,giftgivershavetheoptionofsendingthecardviaemail,textmessageorregularmail.

piSocietyisane-giftingwebsitethatallowsrecipientstochoosetheirowngiftcardsfromanextensivelistofmerchantsbasedonapointsexchangesystem.Participatingmerchantsrangefromrestaurantstosellersofhomecategories,toysandwomen’sapparel.Insteadofsendingagiftcardfromadesignatedmerchant,giftgiverssend“pipoints,”whichrecipientscanredeemforgiftcardsoftheirchoiceonpiSociety’ssite.Bothgiversandrecipientsarerewardedforpurchaseandredemptionactivities.Thesitealsoprovidesadigitalwalletthatcustomerscanusetomanagetheirgiftcards.

Giftcardmanagementandredemptionisanotherareathatstartupsarelookingtodisrupt.Eachyear,alargenumberofgiftcardsarelost,neverredeemedorleftwithsmallbalances.Onaverage,about6%–10%ofgiftcardsareneverredeemed.Americanhouseholdshaveanaverageof$300inunspentgiftcards,accordingtoaBlackhawkNetworksurvey.In2015,anestimated$1billionworthofgiftcardswentunused,downfrom$6.9billionin2008,accordingtoCEBTowerGroup.Thesharpdeclinewasdriveninpartbyfederallegislationdesignedtolimitshortexpirationperiodsonthecards.

Giftcardsdonotrepresentlocked-inrevenueforretailers,asgiftcardrevenuecannotberecognizeduntilagoodorserviceisprovided.Retailershavetoconsiderunusedgiftcardsanunearnedrevenueliabilityuntilthecardsareredeemed.Initsfiscal2015year,Starbucksrecognized$39millioningiftcardbreakage.

CoinstarExchangeisaninstantgiftcardexchangesitethatenablescustomerstoexchangetheirunwantedgiftcardsforcash.Coinstarwillmakeanofferand,ifthecustomeracceptsit,thecustomercanprintavoucheroffthewebsiteandtakeittotheissuingstore’scustomerservicedepartmenttoexchangeforcash.Thewebsiteacceptsgiftcardsfrommorethan150storesandrestaurants.

CentzislookingtosolvetheunusedgiftcardproblemintheUSbygivingconsumerstheoptiontocombinethebalancesfromunusedgiftcardsintoonelumpsumaccountwithCentz,denominatedinadigitalcurrencycalledCentzGoldBucks.UserscanthenuseGoldBuckstopurchasenewgiftcards.Thestartupisalsodevelopingadigitalwalletforuserstostoretheirdigitalgiftcardcredit.Thecompany’spatent-pendingtechnologyincludesatightsecuritysystemdesignedtopreventgiftcardfraud.

Raiseisanonlinepeer-to-peergiftcardmarketplacethatmakesresellingunwantedgiftcardseasier.Itsvisionistoallowgiftcardsellerstogetatleast$0.85backonthedollar,whichisinthehigherrangeofgiftcardresalevalue.Thesiteisnowprocessingtensofthousandsoftransactionseverydayandwasatop-ratedgiftcardresaledestinationin2016.Raise’ssitetraffichasexplodedinthepasttwoyears.AccordingtocomScore,thesitehad5.2millionuniquevisitorsinNovember2015,morethanfourtimesthe

Giftcardmanagementandredemptionisanotherareathatstartupsarelookingtodisrupt.

6

December21,2016

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

numberofvisitorsseenbypeerssuchasGiftCards.com,CardCash.comandCardpool.

GiftingFunctionsAreBeingAddedinMobileWalletsTraditionalwaysofe-giftingviaemailarebeingreplacedbymoreconvenientmobile-giftingoptions.Thetrendisdrivenbynewandimprovedgiftingfunctionsthatdifferentmobilewalletsareexperimentingwithinordertointegrategiftingfunctionalitieswithmobileapps.Sendingelectronicgiftsviamobilewalletmakesitseamlessforrecipientstomanageandspendthegiftcardstheyreceive.

PayPalhaspartneredwiththeNewYork–baseddesignerJonathanAdlertocreatepersonalizeddigitalholidaygiftcardsforPayPalcustomers.Giftgiversareabletoaddpersonalizeddesignelementstoagiftcard,makingthegiftmorethoughtfulandpersonal.

AndroidPayhasdevelopedagiftcardmanagementfunctionthatenablescustomerstosaveandspendalltheirdigitalgiftcardsseamlessly.

ApplePayislookingtoupgradeitsloyaltyprogramsthroughapartnershipwithBlackhawkNetwork.Thispartnershipwillenablecustomerstostoreandmanagetheirgiftcards,andmakepaymentswiththem,viaApplePay.

SocialGiftingMakesGivingGiftCardsMoreFunRetailersandsocialmediaappsaroundtheworldareworkingtogethertoconvertthelargenumberofactiveusersonsocialmediaplatformsintoconsumersandgiftgivers.Starbucksisaleaderinusingsocialmediafore-gifting.ThecompanyjustannouncedapartnershipwithWeChatthatenablesWeChatusersinChinatosendStarbucksdrinkswithapersonalizedmessageviatheplatform.ThecompanyaimstobecomethetopdigitallygiftedbrandinChina.In2011,Starbucksrolledoutane-giftingservicethatallowedcustomerstosendgiftcardsviaemail,Facebook,theStarbucksmobileapporregularmail.In2013,thecompanyintroducedabetatestof@TweetACoffee,wherebyuserswithlinkedaccountscouldsenda$5e-giftviaTwitter.Theprogramranforthreemonths,and27,000peoplesignedup,generatingsalesof$180,000.

Social-giftingappWhiloallowsuserstoadditemstotheirwishlistswhilebrowsingrecenttrends.Usersconnectwiththeirfriendsandfamilywithintheapptosharetheirwishlistsandsolicitgifts.Theappalsosendsoutremindersforimportantgiftingoccasionssuchasbirthdaysandanniversaries.

Differentmobilewalletsareexperimentingwithnewandimprovedgiftingfunctions,drivinggrowthinmobilegifting.

Retailersandsocialmediaplatformsaroundtheworldareworkingtogethertoconvertthelargenumberofactiveusersonsocialmediaplatformsintoconsumersandgiftgivers.

7

December21,2016

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

TheMostPopularRetailGiftCardsOfferaWideSelectionofProductsManyconsumerspreferretailgiftcardsfromonlinemarketplacessuchasAmazonandbig-boxmerchantssuchasWalmartandTargetbecausetheyofferawidearrayofproducts.Giftcardsfrombig-boxretailersalsotendtomaintainhigherresalevalueduetohigherdemand.AccordingtoWalletHub,a$100giftcardfromapopularmerchantsuchasWalmartcangenerate$83.12inresalevalueversus$61.17onaverageforacardfromForever21.

Figure5.MostPopularGiftCards:2016vs.2015

2016 20151 Amazon Visa

2 Visa Amazon

3 iTunes AmericanExpress

4 AmericanExpress iTunes

5 Walmart Walmart

6 Target Target

7 Starbucks Starbucks

8 GooglePlay Netflix

9 Netflix eBay

10 eBay GooglePlaySource:WalletHub

AccordingtoWalletHub,a$100giftcardfromapopularmerchantsuchasWalmartcangenerate$83.12inresalevalueversus$61.17onaverageforacardfromForever21.

8

December21,2016

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJingWangResearchAssociate

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com