The Redbox, a DVD rental kiosk business operated by Coinstar, Inc. (NASDAQ:CSTR), has seen terrific growth over the past few years. With over 43,000 kiosks 68% of Americans live within 5 minutes of a Redbox. Coinstar, Inc. (NASDAQ:CSTR)’s other business, its namesake kiosks which convert spare change into cash, has an 80% share of the US automated retail coin market. The company has grown revenue at an annualized rate of nearly 25% since 2008 as Redbox’s popularity has exploded, and EPS has grown from $0.50 in 2008 to $4.67 in 2012.
Redbox accounts for about $2 billion of the $2.2 billion of total revenue, around 90%. The Coinstar, Inc. (NASDAQ:CSTR)r business is tiny in comparison, and near-term growth is mainly tied to the expansion of Redbox. But Redbox is destined to eventually become obsolete. As more and more content is streamed or downloaded directly onto various devices the era of physical media will eventually end. Although Redbox is convenient, it can’t match the convenience of a few button presses or mouse clicks.
Digital distribution
Netflix, Inc. (NASDAQ:NFLX) started out as a DVD-by-mail service before branching out into the streaming business. Netflix, Inc. (NASDAQ:NFLX) is largely responsible for killing the traditional video rental business, creating a void which Redbox filled. But Netflix, Inc. (NASDAQ:NFLX) has shifted its focus to streaming, and the DVD-by-mail service has been in a slow decline. One year ago there were 10 million mail subscribers; now there are 8 million. At the same time the number of domestic streaming subscribers has increased by 26%, and international streaming subscribers have more than doubled.
These numbers tell a story of the decline of the DVD and a shift in how consumers view content. Redbox, ultimately, is doomed. It may take a few years before that becomes obvious, but it is inevitable.
Future ventures
Coinstar, Inc. (NASDAQ:CSTR) has a series of new automated retail concepts which it’s currently testing as the company looks to move into other markets. Rubi is a coffee vending machine which brews Seattle’s Best Coffee, and the company has installed about 80 kiosks so far. The average revenue per machine per year in 2012 was $12,000, and the company plans to greatly increase the number of locations in 2013. The company believes that 65k-70k kiosks could eventually be installed, which would translate into about $800 million in revenue at the current run rate.
Seattle’s Best Coffee is actually owned by coffee giant Starbucks Corporation (NASDAQ:SBUX), so the partnership suggests that Starbucks Corporation (NASDAQ:SBUX) is confident in the success of these kiosks. It’s certainly much less capital intensive to build and maintain a kiosk than a Starbucks Corporation (NASDAQ:SBUX) store, and the lower prices are sure to draw in customers who wouldn’t normally go to Starbucks. This seems like a good idea, although it won’t even come close to matching the size of Redbox.
This deal benefits Starbucks tremendously. The lower-priced options allows Starbucks to compete against McDonald’s Corporation (NYSE:MCD) $1 coffee, and I would wager that the quality of the coffee from the machines may be higher than that of golden arches. With so many Starbucks stores already, this opens up a new avenue of growth for the company.
A less promising looking concept is the Crisp Market kiosk. This is a machine which vends fresh, healthy food like salads and sandwiches. The first kiosk was opened in Chicago in 2012, and the company is planning to build out the Chicago market before any further expansion.
I think that there is a general mistrust of fresh foods from vending machines which will hamper Crisp Market’s success. There are plenty of places that sell pre-packaged fresh foods these days, so I think that if Crisp Market is successful it will be a fairly small business for Coinstar, Inc. (NASDAQ:CSTR).
There are a few other concepts, such as an electronics vending machine and a machine that lets people sample beauty products, but none of them look very promising.
10 years from now
When considering investments one should think about what the company will look like in ten years. By that time I suspect Redbox will be in a decline, so other vending businesses will need to pick up the slack. The Rubi is the only truly promising concept, but it’s not enough to make up for Redbox. Now, it’s possible that the Redbox gets transformed over the next 10 years; some locations have started selling tickets to live events for a $1 fee. And the partnership with Verizon Communications Inc. (NYSE:VZ) to create Redbox Instant is something, but it puts the company in even more direct competition with Netflix, Inc. (NASDAQ:NFLX).
I think that the Redbox is a bit of an anomaly for Coinstar, Inc. (NASDAQ:CSTR). Ten years from now I suspect that the company’s revenue stream will be far more diversified, but growth over this period will be much slower than in the past.
Value trap
Coinstar, Inc. (NASDAQ:CSTR) seems to be a value trap. Trading at 11.3 times earnings the stock seems to be cheap, but the enormous dependence on Redbox will ultimately hurt the company. Earnings will likely start to decline within a few years as streaming becomes even more ubiquitous, and it will take quite some time for the other vending concepts to pick up the slack. I’d stay away from Coinstar until the future becomes much more clear.
The article The Future Is…Vending Machines? originally appeared on Fool.com and is written by Timothy Green.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
