TGI Fridays has declared bankruptcy, leaving holders of nearly $50 million in gift cards uncertain about how they will be able to redeem them. The main question is whether the parent company or its franchisees are responsible for this debt.
The bankruptcy filings include TGI Fridays’ 39 company-owned stores, but not the franchise locations. Franchisees operate 122 locations in the United States and another 316 overseas.
Under normal circumstances, when customers use gift cards at franchise restaurants, the company reimburses the franchise. However, according to court records, TGI Fridays’ franchises may be required to honor company-issued gift cards, even if reimbursement is uncertain.
To begin its restructuring under bankruptcy protection, the company borrowed $5.9 million. This has led many franchisees to worry that TGI Friday may not have the funds to cover the amounts owed to gift card holders.
The Consumer Side
From a consumer perspective, there is no differentiation between franchise-owned and corporate-owned restaurants; the gift cards are part of a unified program redeemable at any location.
“The issue arises in the franchisee-franchisor relationship,” said Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research. “The franchisor can theoretically refuse to pay back the franchisee when a gift card is redeemed, leaving the franchisee on the hook for the sunk cost of that transaction.”
Certainly, the restaurants aren’t expecting all gift card holders to redeem their cards immediately. According to court documents, some of these cards date back as far as 2003.
However, TGI Fridays has committed to honoring the gift cards at stores that remain open. The judge overseeing the case has permitted the company to continue its gift card program, which would give franchisees more time to review their finances and confer with corporate administration.
“In the short term, consumers with Fridays gift cards should be able to redeem them,” said Hirschfield. “In the long term, the perilous financial outlook of the chain means that if further restructuring occurs, those cards may be rendered valueless.
“It also highlights the dynamic between of long-term liability on unused cards,” he said. “I would assume that the chain recognized revenue on a good portion of those cards, as they date back to 2003, but would still have to honor the value due to regulations that prevent expiration of gift cards. But it’s likely that a high percentage of this liability is on cards well over five years old that individuals have lost or forgotten, or cards with little value remaining that the user just wrote off.”
