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Well it has been a week since it was announced that Franchise Entertainment Group (FEG) bought EzyDVD and it seems that little news worthy has happened yet. I do wonder however what will become of the thousands of dollars worth of gift cards that where sold in the lead up to Christmas, only to be dishonoured when the card holders tried to buy DVDs with them.

According to reports, EzyDVD went into receivership with debts of $18 million. According to Ferrier Hodgson’s Press Release, “the group purchased the EzyDVD brand and online business, the franchise network, as
well as stock, plant and equipment and 11 company-owned EzyDVD stores.” Other reports say that FEG paid $10 million for the assets of EzyDVD. This would appear to leave a $8 million hole yet to be filled.

While EzyDVD was under the receivers control, people who had EzyDVD Gift Cards were told to lodge a claim with the receiver and that they would be listed with other unsecured creditors. I think that with the $8 million deficit unsecured creditors would have little chance of seeing their money back via that avenue.

So where is the money that customers paid for the Gift Cards with? To answer this we need to look at how the gift voucher systems work. When we opened our EzyDVD stores in 2003 there was no plastic “Gift Card” system for EzyDVD. What we had in stead was a gift voucher system that was printed off and recorded at the point of sale (POS) terminal in store.

What this means is that when a customer bought a gift voucher from us say for $100 we banked the money in our (franchisee) bank account. The amount of the gift card was shown as a liability in our accounting records. When the gift voucher was used in store at a later date, the voucher was recorded on our POS as a payment and the liability in our accounts system was removed. What was good for us at the time was that the gift vouchers (like the current “Gift Cards” had an expiry date. Inevitably a percentage of Gift Cards purchased were never redeemed. This meant that when the gift card expired we (the franchisee) kept the money. (The expiry period was 12 months from purchase, but generally gave customers 12 months grace)

This process is common amongst businesses and it is possible for unredeemed gift vouchers to be worth several thousand dollars per year. Free money for their franchisees… not on their game plan… Introducing the EzyDVD Gift Card.

The EzyDVD Gift Card system is similar to the multitude of Gift Card systems available today. What they are designed to do is remove the ability of a franchisee to make a bit of extra profit from unredeemed Gift Cards and put that money in the pocket of the Franchisor. These Gift Card systems are usually operated by a third party company. The Gift Card in most respects is the same as a debit card. When a customer buys a Gift Card the money is deposited in a special account to be held until the gift card is used or the card expires (12 months from the date of purchase). When the Gift Card is used, the money is taken out of this account. The EzyDVD Franchisee does not have the money paid to them for the purchase of the Gift Card.

So how much is this worth to a Franchisor? Let’s say that each store sells $1000 a week in gift cards. That is $52,000 a year. Let’s say 5% of gift cards are lost or otherwise not redeemed, $2,600 per store. At the time of going into receivership EzyDVD had 58 stores in the chain… 58 x $2,600 = $150,800

Of course this example could be wide of the mark, but you can see why a franchisor may want to operate a gift Card System this way. Now let’s consider FEG position on the EzyDVD Gift Cards. Say each store sold $1,500 per week in gift cards in the 3 weeks up to the receiver halting the sale and redemption of the cards, and that none of these cards were redeemed. 3 x 58 x $1,500 = $261,000. This is a substantial amount of money to come up with little hope of getting the money back. But is it a small amount to pay to win back all those disgruntled EzyDVD customers? And if they chose not to honour the Gift Cards, how will those customers feel about EzyDVD’s new stable mates, Video Ezy and Blockbuster?

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