Bright Spots

Redbox Rakes in Green in Tough Times

Cheap DVD Rentals in Convenient Spots Are Big Hit With Belt-Tighteners

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YORK, Pa. (AdAge.com) -- Those wallet-friendly $1 DVDs dispensed by big, red boxes at McDonald's, Walmart and other retailers have catapulted to the top impulse buys in the front of the store. And all those singles are adding up to a big chunk of change for Redbox parent Coinstar.

Box score: Front-of-store locations in Walmart, McDonald's draw customers.
Box score: Front-of-store locations in Walmart, McDonald's draw customers.
"It's convenient and it's inexpensive," said Infonetics Research analyst Jeff Heynen. "Every time I go to the grocery store, there's a line in front of the Redbox."

Even as sales of DVDs slide -- they were down 9% to $14.5 billion last year, according to Digital Entertainment Group -- Redbox rentals increased 180% to $400 million in 2008, driven by new units, though even existing units posted robust 52% same-store-sales growth. Chief Operating Officer Paul Davis, who will become Coinstar's CEO in April, predicted in a fourth-quarter earnings call with analysts that Redbox sales will climb another 80% this year to reach $650 million to $700 million.

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Coinstar, whose original business was converting spare change into cash for grocery-store shoppers, is bullish enough on the Redbox concept that last week it bought out McDonald's subsidiary GetAMovie's 44% interest.

Redbox estimates it already has more than a 9% market share of DVD rentals, but Mr. Davis said that share can go much higher, as evidenced in two of Redbox's more-established markets, Houston and Denver, which each have 20% market share. Coinstar also owns the smaller DVD Express.

Well-positioned brand
It's not just Redbox that is benefiting from the recession. Though Digital Entertainment Group said DVD rentals, including kiosk sales, were flat last year at $7.5 billion, video-rental-measurement firm Rentrak reported that rentals were up 4% in the fourth quarter of last year.

Gary Lancina, Redbox's VP-marketing, acknowledged that the economy is having an effect on Redbox's success, but added, "Redbox was doing well before the economy turned south. In hard times, great brands with great value propositions will continue to do well."

While the $1 price is certainly a big draw for Redbox, its allure also includes convenience, location and new releases, which are added every Tuesday. Redbox users also can return the movies to any machine, and they can go online to see the contents of a particular box and reserve a movie for later pickup.

Mr. Lancina, whose background includes a stint as a senior brand manager at S.C. Johnson, said Redbox has established itself as a brand, just like a bar of soap. "It's a 6-foot-tall package," Mr. Lancina said. "It has to do the same thing as a package good. We have to use that to grab consumers' attention, engage them and want to interact with the product."

'One more dollar'
"Being cheaper doesn't always mean success," said Forrester analyst James McQuivey. "They're at the front of the Walmart, and people are in a shopping and saving mode, and they think, 'OK, sure, one more dollar.'"

One Redbox devotee is Michael Lantz, who founded the indie Inside Redbox website in 2005, when there was just a smattering of boxes -- five in his local Salt Lake City test market -- as a place to share Redbox stories. Now there are 10 boxes within a mile of his home, and the site logs 250 to 300 new members daily.

Mr. Lantz said the low price is the main attraction for most of the people he talks with, and, in fact, one of the site's popular draws is a weekly free-rental code. Redbox sends the codes each week in text messages to customers. Mr. Lancina calls it "Free Movie Monday" and sends the codes to customers who provide a mobile-phone number.

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