Redbox: Coinstars Red-Hot Growth Machine

Coinstar CEO Paul Davis with one of the companys successful Redbox machines.

It took coin counter Coinstar Inc. 10 years to make its first profit. Its taken the firm nearly another 10 to figure out what else it could sell in conveniently located, self-serve kiosks. The answer: $1 DVD movies.

After investing in gift cards, gumballs, crane games, e-payments and money transfer companies, the Bellevue-based company has finally hit the jackpot with Redbox, its movie rental business.

Penny-pinching consumers have flocked to the red boxes in the past 18 months seeking cheap entertainment during tough times. Such popularity has helped Coinstar nearly double revenues to $1 billion and made it a Wall Street darling, its stock trading as high as $60 a share.

Coinstar chief executive Paul Davis has presided over a major garage sale in the last year, shedding the companys unprofitable and slow-growth businesses in order to invest in Redbox, which now brings in 80 percent of revenues while also nurturing its core business, counting coins. Arguably, Coinstars best investment in the past year was picking up full ownership of Redbox, a business concept conceived by McDonalds and co-funded by Coinstar beginning in 2005.

The premise behind Redbox is simple: Consumers choose from 200 movie titles, paying $1 a night. They pay no late fees and can return the DVD to any Redbox, whose locations are where people go each week: grocery and convenience stores. Consumers can reserve titles and find nearest locations online. In addition, 19.2 million people have signed up to have their receipts delivered by e-mail.

Redboxs 24,000-plus kiosks deliver 9 million movies weekly, a volume that allowed it to surge past and steal market share from brick-and-mortar stores like Blockbuster. Too, its taken aim at subscription-based and mail order house Netflix, which caters to a different set of movie watchersthose who want to see older titles. Coinstar recently rented out its 1 billionth movie.

The company is also pursuing a digital distribution strategy to compete with Netflix Inc., which streams more than 20,000 titles accessible to its more than 15 million subscribers. The Redbox strategy, scheduled to be announced after this magazine went to press, was expected to involve a service that would allow subscribers, for a monthly fee, to stream movies over the internet as well as to pick up a certain number of DVDs a month from the kiosks.

While Redbox is clearly Coinstars growth vehicle, its 14 percent operating margin is nowhere near the 38 percent operating margin that the coin business brings in, one reason why the green coin kiosks are not on the chopping block.

Coin counting is going to be around for a long, long time, says Davis. Its a great business.

Whats Next?

Now that Davis knows consumers are comfortable using conveniently located, self-service kiosks, his team is looking for additional opportunities. They are testing ecoATM, a kiosk that recycles cell phones, as well as testing kiosks that deliver video games. Coinstar is talking to Bath and Body Works about launching a series of cosmetics kiosks, and is also looking at other products, such as gourmet coffee, that can make use of the kiosks.

If it can stay true to its strategyoffering an edited selection of value-priced products and locating the kiosks in places people already goRichard Outcalt and Patricia Johnson, partners in Seattles Outcalt & Johnson: Retail Strategists LLC, believe Coinstar will do well. Additional products wont necessarily require adding employees because Coinstar has a team in place to service the kiosks, Outcalt points out. The future kiosk opportunities for Coinstar are incredible, he says.