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Starbucks Corporation (SBUX): Can Rubi Save Coinstar, Inc. (CSTR)?

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Coinstar, Inc. (NASDAQ:CSTR) remains one of the most heavily shorted stocks on the Nasdaq, owing to the belief held by many bears that the company’s Redbox subsidiary is doomed. But recently, in association with Starbucks Corporation (NASDAQ:SBUX), the company has started rolling out coffee dispensing machines known as Rubi. Can these machines save Coinstar?

Wait, does Coinstar even need saving?

The title of this piece makes an assumption: the company is in danger and in need of being saved. I freely admit that could be a faulty assumption, but it’s one many market participants have made.

Currently, over half of Coinstar, Inc. (NASDAQ:CSTR)’s shares have been sold short. The short interest is so high that investors might actually consider going long the stock in the hopes that any positive news could trigger a violent short squeeze.

The bear case against the company is as follows: Coinstar is heavily reliant on its subsidiary Redbox — a system of vending machines that offer DVD rentals. As consumers increasingly switch from physical discs to digital streaming, the need for Redbox’s kiosks will vanish.

As Redbox makes for most of Coinstar’s business — and virtually all of its growth — technological changes could doom Coinstar.

That said, perhaps the bears are getting ahead of themselves. On the company’s last earnings call, its CFO remarked that the physical rental business is still “sitting around $5.5 billion, and is expected to grow to $6 billion over the next couple of years.”

Coinstar, Inc. (NASDAQ:CSTR)’s competition in the space is literally vanishing. DISH Network Corp. (NASDAQ:DISH) announced in January that it was closing another 300 Blockbuster stores, meaning that there are just 500 left in the entire country.

Digital rentals may be fine for some, but for many consumers — those who lack cable and those without Internet-connected TVs — disc rentals remain the preferred method for watching movies, and could for many years.

Coinstar doesn’t see itself as just Redbox

But although Redbox is such a big part of Coinstar, the company doesn’t see itself exclusively as Redbox. Rather, Coinstar views itself as a leader in “automated retail.”

“I believe Coinstar will continue to lead in this growing space,” remarked Coinstar’s CEO Paul Davis on the company’s earnings call. “Consumers love it because it makes their lives easier and they’re in control. Retailers love it because it increases traffic and revenue and helps them stay competitive, and shareholders love it because it’s an enduring business that has ongoing growth potential.”

Coinstar, Inc. (NASDAQ:CSTR) appears to understand the bear case, and is taking steps to address it, rolling out automated coffee machines known as Rubi.

“The primary focus in 2013 will be on the Rubi business,” Davis stated. “This business continues to be a major area of focus, given its growth potential and we plan to begin the rollout in [the second quarter].”

Can Coinstar repeat its Redbox success with Rubi?

But will Rubi be successful? While consumers have flocked to Coinstar’s Redbox, perhaps they won’t take as kindly to its Rubi coffee machines.

Evidently, Starbucks Corporation (NASDAQ:SBUX) doesn’t see it as much of a threat. The coffee giant is partnering with Coinstar, Inc. (NASDAQ:CSTR) on the venture, as Rubi machines will sell “Seattle’s Best Coffee” — a division of Starbucks.

Of course, Starbucks has a history of partnering with coffee-upstarts. Starbucks has been one of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s biggest partners, even though the Keurig machine might be thought of as a potential competitor. In May 2011, Starbucks inked a deal with Green Mountain to sell Starbucks Coffee and Tazo tea K-cups. If Starbucks Corporation (NASDAQ:SBUX) had viewed the Keurig as a challenger to its cafes, it likely wouldn’t have signed such a deal.

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