Article

Economy may have Coinstar, redbox on a roll

Counting coins and cheap rents have special appeal when money is tight.

May 4, 2009 by Kiosk Marketplace

For months, Tom Harold had been throwing his loose change into a couple of jars on his dresser, filling both containers until the quarters, nickels and dimes began to spill from their tops.

That's when he made his first trip to one of the green, seemingly ubiquitous Coinstar change-counting kiosks. He fed about $86 from one jar and more than $150 from the other one. With money tight in this ragged economy, Harold, a public assistance consultant from Indianapolis, said every penny counts.

"I'm bucks-down now," said Harold, 29. "And I used a bunch of that money to buy things that were outside my strict budget: a bunch of art supplies and some music."

Thanks to Harold and millions of people like him who tote their cans, bottles and buckets of coins to the green machines, the stock of Coinstar continues to soar even as the overall market sits near its lowest levels in years. A recent management shakeup isn't expected to slow an expansion plan that will give Coinstar and its recently acquired movie-kiosk company, redbox, a footprint of about 40,000 machines in the United States by the end of the year.

And while no one will say outright that the success of the Coinstar companies is directly related to the economy, a case could be made that the downturn has uniquely positioned Coinstar and redbox, which rents movies for a dollar a night, to thrive as Americans clamp down on every cent.

"We don't attribute the popularity of our coin counting service to the economy as we've seen year-over-year growth in coin volume for a number of years," said Marci Maule, Coinstar Inc.'s director of public relations. "We talk to consumers on a fairly regular basis, and what prompts them to cash in coins is when their coin jar gets full. We're not necessarily seeing people cash in more frequently or earlier, but we consistently see new users coming to Coinstar as more people become aware of the service."

Redbox, she said, was well positioned even before unemployment and foreclosures marred the landscape. "Really before the downturn in the economy, (redbox) seemed to be the right service at the right time."

Coinstar's stock so far this year has been trading above $31 per share, more than double its price in December. This is fueled in part by its agreement in February to purchase the remaining shares of redbox, in which it already had a majority stake. Revenue is expected to grow as both companies plan to add kiosks this year — redbox is planning to jump from 14,000 machines to about 20,000, and Coinstar hopes to add about 1,000 units this year to surpass 19,000 coin-counting kiosks. But can the good times last?

Other analysts say DVD rentals can't stay profitable forever, as new technologies emerge to replace them. In a column earlier this month, the Wall Street Journal expressed doubts about redbox' long-term value, saying its price wasn't a bargain compared to competitor Netflix, which was performing more than 25 percent above expectations and ships movies right to devices like the Xbox 360.

Another potential hindrance for redbox is its lawsuit with Universal Studios, which argues that redbox's cheap rental model will lead people to stop buying movies. Universal last year sought to withhold DVDs from redbox until 45 days after release to prevent competition with sales. Universal then instructed wholesalers to cut off supplies when redbox rejected the deal. Redbox later sued Universal, alleging restraint of trade. Maule said the company cannot comment on ongoing litigation.

But Coinstar's fortune continues to be further linked with redbox.

Paul Davis, who had been hired as Coinstar's chief operating officer last May, recently moved up to replace the retiring Dave Cole, who had been Coinstar's chief executive since 2001. Davis was an experienced executive who had worked for Kettle Foods and PepsiCo's Frito-Lay Company.

Davis was replaced as chief operating officer by redbox executive Gregg Kaplan, who had been redbox' CEO. Redbox chief financial officer John Harvey is taking the same position at Coinstar after chief financial officer Brian Turner decided to leave the company.

Last year, Coinstar processed $3 billion in change at 18,400 machines, up slightly from $2.9 billion processed at 15,400 machines.

Coinstar also has worked to keep its offerings fresh. It is seeking new retail partners for its Coin to Card program, which waives its 8.9 percent service fee if a customer chooses to convert the change counted into gift cards for partner retailers such as Amazon and Starbucks. The program was started in 2005 to attract people who balked at the service charge.

The total takeover of redbox gives Coinstar full control of a thriving — and still growing — business. And Coinstar has inroads into grocery stores and convenience stores that redbox has been trying to enter.

"I think it's quite a good fit," said Francie Mendelsohn, president of Summit Research Associates. "But it's short term. Five years from now, we're not going to be talking about DVD kiosks. The model is going to change."

Maule acknowledged that digital downloads are expected to challenge DVD rentals, but pointed out that many customers will still choose DVDs over downloads, which can take hours to transfer and can average about $3.99 per movie.

But the slow economy may delay that change, Mendelsohn said, because consumers won't want to spend money on whatever machines finally replace DVD players. "If you don't have a job, you're not going to buy new equipment," she said.

Coinstar's own research shows how harsh economic times could work in its favor.

More than one-third of Americans value loose change more than they did a year ago, according to a poll commissioned by Coinstar late last year.

Of the two-thirds of those polled who said they accumulate change, 32 percent said they are recycling or cashing in that change more now than a year ago (the study did not ask how they were cashing in the change — in machines, spending it, or rolling it and taking it to banks, Maule said).

And 46 percent of people said they planned to spend their loose change on fun purchases.

Harold, who cashed in his first two jars this year, said he didn't mind paying Coinstar's fee to count his change, since it saved him an evening of rolling change at home. And he said he would use Coinstar again.

"I have a lot of pennies," he said. "I should take those in."