| |

Analysis of Redbox

University of Saint Mary

Cairo Team

November 9, 2012

Redbox Coinstar, Inc., through its subsidiaries, provides automated retail solutions primarily in the United States, Canada, Puerto Rico, Ireland, and the United Kingdom. The company owns and operates self-service Redbox kiosks that allow customers to rent or purchase movies and video games; and self-service coin-counting kiosks where consumers can convert their coin to cash, a gift card, or an E-certificate. Coinstar, Redbox's parent company, is led by a savvy management team. By maximizing the value of Redbox and investing in new technologies it is the best way to capture opportunities along with various dimensions such as new customer segments, geographic, product segments, and strategic moves. Coinstar has built a promising future by taking their kiosk-based business to a new level. Strategic investment, position and new technology lead the way to the competitive advantage in the movie rental industry. The Redbox Company is a subsidiary of Coinstar Inc.; it is a kiosk run retailer which provides movie rentals to consumers at an inexpensive rate. Redbox Automated Retail LLC began operations in 2004 with funding provided by McDonald's Ventures, a subsidiary of McDonald's Corporation. The initial Redbox vending machines were placed in a number of McDonald's fast-food restaurants. (Thompson, Peteraf & et al, 2012) As of December 31, 2011, the company had 35,400 Redbox kiosks in 29,300 locations, primarily in supermarkets, drug stores, mass merchants, banks, convenience stores, and restaurants. Coinstar, Inc. was founded in 1991 and is headquartered in Bellevue, Washington. comments, called-out

+ Comment now

Move up http://i.forbesimg.com t Move down

Financial Profile From a corporate standpoint Coinstar management has been aggressive in continuing to deploy additional vending machine kiosks. “The company planned to install 7,000 to 8,000 new kiosks in 2010, of which some 2,400 had been deployed by April 1, 2010. Plans called for capital expenditures of $115 million to $125 million for new kiosk locations. “ (Thompson, Peteraf & et al, 2012)

CSTR is a smaller mid-cap ($2 billion) company that is trading at about 14.85 times forward (expectations for next quarter) earnings. Coinstar’s valuation is attractive for a company with a growth history like Coinstar. Its current PEG (Price Earnings Growth) ratio is on the low side at .86 compared to its peers. The company reported a quarterly sales increase of 12% in its last earnings report. Annual sales were up 33% compared to fourth quarter 2010 with total sales of roughly 1.84 billion in fiscal 2011. CSTR earnings jumped almost 108% from $1.57 per share in fiscal 2010 to $3.26 in fiscal 2011. CSTR is expected to earn $4.43 in FY2012 according to the Sacks Consensus Estimate.

Corporate Strategies

The Redbox company strategy is centered on attracting customers with a combination of low price and convenience and by rapidly expanding the number of shopping locations with a Redbox kiosk. This part of its strategy and success is its strategic placement of its kiosks (DVD and coins) as well as its partnerships with other major companies like StarBucks, Lowes, CVS, Maggianos and more. These partnerships not only allow Coinstar users to get the entire value of their change towards a gift card, but the subsidies and mutual relationships with other vendors add to Coinstar’s revenue and visibility. Some recent developments are that the company is expanding their services with the launch of Rubi, the company’s coffee kios initiative. Also, Redbox has signed a new 28-day content agreement with Verizon. This allows Redbox to offer movies in their kiosks 28 days after they are released to DVD. This will increase completion with Netflix, Amazon Prime and other online video companies. As easy as it may seem, placing Coinstar machines at the right store location is extremely complex and of vital importance for success. Maximizing the best location for meeting consumer needs is the difference between business success and failure? As the Coinstar/Redbox enterprise grows, from hundreds to thousands of machines, finding the best location to place a new machine and evaluating how that new location may impact the rest of the existing enterprise became an even more arduous task. Coinstar has also turned to database technology to collate reams of information that continually swell with each new store. These databases are used to answer a number of questions regarding new store site-selection questions. But the company still does not have an effective means for separate department officials, from marketing to operations to sales, to integrate, share, and leverage each other’s data and work experience knowledge. After searching for a solution that would better integrate information and allow easy access across the enterprise, Coinstar recognized that geographic information system (GIS) could meet these needs, provide powerful mapping, and provide a platform for future growth. The Coinstar Company has also completed a repurchase plan to increase stockholder value. Stock repurchase (or share buyback) is the reacquisition by a company of its own stock. In some countries, including the U.S. and the UK, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.
Opportunities:

It is known that 68% of the U.S. population lives within a 5 minute drive of a Redbox location. To find the closest box consumers can visit the internet or download the Redbox mobile app for the iPhone, Android, or Kindle Fire for free, an advantage for current users. The most recent addition in Philadelphia (October 3, 2012) is that Coinstar wants to tap its customers' yen for entertainment outside the living room at live venues, planning to offer event tickets at its Redbox DVD-rental kiosks for a flat fee of $1. This brings Philly consumers a whole new way to discover and purchase tickets to local live events and attractions. The new business, which it is rolling out in Philadelphia before expanding to Los Angeles early next year, comes as investor unease about the limited life span of Redbox's physical rentals.

Advantages

RedBox is able to supply customers with product faster and cheaper than its competitors due in part because it has no retail space such as a store in which it has to pay overhead costs for. There are also no actual location employees in which to train, hire, or manage since the business model is a kiosk that is located outside of other retail operations. There are field agents that can manage multiple locations and thus also cut down on overall operating costs.

Redbox can offer rentals at a much cheaper rate than streaming options due to the “first sale doctrine” which is a concept in copyright law that allows someone to buy a copyrighter work in a physical form and then rent it out or sell it without permission.

Many agree that automated retail is brilliant. It gives the advantage of not needing full time employees, the ability to leverage technology, and to utilize heavily trafficked areas without making any major rental commitments.

Potential risks:

Contracts with retailers are terminated, or are renewed with adverse terms digital downloads continue to grow and dominate the physical DVD rentals international expansion, can increase foreign risks (currency, political) Recently; the company has alluded to the development of a new product at Redbox that would widen its business but stick within its entertainment wheelhouse.

Redbox is no longer renting movies for $1 a day. The kiosk operator, owned by Coinstar, said it will increase prices by 20% to $1.20 for each DVD. Prices for Blu-ray discs and videogame rentals will remain the same at $1.50 and $2, respectively, for now. This however, marks the first time Redbox has changed the price of its DVDs in eight years. Redbox said it was forced to raise prices "primarily due to the increase in operating expenses, including the recent increase in debit card interchange fees as a result of the Durbin Amendment," Coinstar CEO Paul Davis said in a statement (Graser, Oct 2011) Redbox continues to succeed in a world where you can do just about everything wirelessly, it’s hard to believe that coin counting machines and DVD rental kiosks are still flourishing. Despite streaming movie giants like Apple’s iCloud and AppleTV, Netflix, Amazon Prime and Hulu, renting a physical DVD clearly still has its appeal to some consumers. It is also an important aspect that Coinstar is a well-managed, growing business of point of sale automation. The growth opportunity here for automation revolutionizing retail is huge.
Takeaways

1. Companies that advance on a dying market through new and innovative ways are more likely to succeed than companies that do not change and grow with the retail environment.

2. Ensuring a companies’ growth through expansion of locations, can be a double edged sword, in that yes it means the company has better opportunities to gain market share , but it also means there are more cost expenditures in which the company must now take into account and deduct from overhead costs.

3. Availability, convenience and ease of operations are key aspects in attracting and retaining a target customer base.

References

Dow Jones News Wire 10/2012

Graser, Marc. Variety, Film News. Redbox increases rental price to $1.20. October 207, 2011

Thompson, A., Peteraf, M., & et al, M. (2012). Crafting & executing strategy: The quest for competitive advantage. (18 ed.). New York: McGraw-Hill/Irwin.

Savitz, E. Forbes Magazine 04/2012

Stark, Karl and Stewart, Bill. February 09, 2012 Redbox’s Smart Move: What You Can Learn (www.ink.com)