TGI Friday's Bankruptcy Problem: $50M In Gift Cards

Nov 19, 2024 • 10 min read

TGI Fridays' Gift Cards: From Sizzling Deals to Risky Assets Amid Bankruptcy TGI Fridays, the iconic American casual dining chain known for its potato skins and festive atmosphere, is facing a new challenge amid its recent bankruptcy filing: a potential "run on gift cards" that could further strain its financial recovery.

In its first bankruptcy hearing on Monday, franchisees expressed deep concerns about being obligated to honor gift cards when the corporate entity may soon run out of funds. According to a report by Reuters, TGI Fridays currently has $49.7 million in outstanding customer gift cards but only $5.9 million in cash on hand—a sum it's borrowing to support the restructuring process.

Franchisees on the Hook

Before the bankruptcy filing, TGI Fridays would reimburse its franchise locations when customers used gift cards. With the company's financial woes, franchisees fear they will bear the burden of honoring these cards without corporate support. During the hearing, a lawyer representing the franchisees highlighted the risk of a surge in gift card redemptions—a phenomenon akin to a bank run—as customers rush to use them before it's too late.

"The franchisees are worried about a 'run on gift cards' leading to significant losses at a time when margins are already thin," the attorney noted.

A Decades-Old Liability

Adding to the complexity, some of the outstanding gift cards date back 21 years, and in theory, they do not expire. Financial analyst John Bringardner of Debtwire advised consumers holding TGI Fridays gift cards to act promptly.

"Go use it, otherwise you could end up in line for repayment behind a bunch of other creditors," Bringardner said. In bankruptcy proceedings, gift card holders are considered unsecured creditors, making them likely to receive only pennies on the dollar if the company cannot honor the cards.

Gift Cards: A Double-Edged Sword

Despite the potential liability, TGI Fridays has announced it will continue to honor gift cards and reimburse franchisees, recognizing that these coupons still drive a significant portion of sales. According to Bloomberg, gift card redemptions bring in an average of $132,000 in revenue each week for the chain.

"Maintaining customer trust is crucial during this restructuring period," a TGI Fridays spokesperson said. "We are committed to ensuring our guests can continue to enjoy their favorite meals using their gift cards."

The Bigger Picture

The situation at TGI Fridays underscores the challenges retail and dining establishments face when navigating bankruptcy while maintaining customer goodwill. Gift cards, often seen as a boon for businesses due to upfront cash flow, can become significant liabilities when companies face financial distress.

Retail analysts note that it's not uncommon for businesses to struggle with outstanding gift card balances during bankruptcies. In many cases, companies either suspend acceptance of gift cards or set deadlines for their use. Customers are often left uncertain, prompting a rush to redeem cards, which can strain the company's limited resources further.

What Consumers Should Do

For those holding TGI Fridays gift cards, the advice is clear: use them sooner rather than later. While the company currently plans to honor them, circumstances can change rapidly in bankruptcy proceedings.

"Customers should be proactive," Bringardner emphasized. "If TGI Fridays' financial situation worsens, gift card holders may find themselves with worthless pieces of plastic."

Franchisees Seek Clarity

Franchise operators are seeking assurances from the corporate entity to mitigate potential losses. The uncertainty over reimbursement for gift card redemptions adds another layer of complexity to their operations, especially when they are already grappling with the challenges of running a business during an economic downturn.

Conclusion

As TGI Fridays works through its bankruptcy restructuring, the handling of gift cards remains a critical issue for the company, its franchisees, and its customers. The balance between honoring commitments to consumers and managing financial liabilities will be a delicate one, with significant implications for the brand's future.

For now, TGI Fridays' gift cards might not be as volatile as cryptocurrency, but they carry their own risks. Consumers and franchisees alike are watching closely, hoping for a resolution that preserves both the company's legacy and their own financial interests.