Redbox Customers to See More Games, Fewer Blu-rays in June

After “extensive” testing of video game rentals, Coinstar said in its Q1 earnings call it will expand video game rentals on June 17 from 5,000 test locations to 21,000 Redbox locations nationwide for $2 daily. Calling video game potential “significant,” CEO Paul Davis said last week that games will attract new customers and give existing ones “yet another reason” to visit a Redbox kiosk. He cited NPD data that videogame software sales totaled $9.3 billion in 2010 and said company research shows many consumers want to “try before they buy.” Coinstar Chief Financial Officer Scott Di Valerio said in March that videogames are typically less than 10 percent of a kiosk’s titles, and the assortment varies by region depending on which videogame console is more popular in a given area (CED March 11 p2).

Davis said if games couldn’t “at least meet or beat” the performance per slot of DVDs, Redbox wouldn’t have expanded the test. The move to games brings in a new demographic that’s complementary to the current consumer base and “appeals to the whole family.” For $3 -- $2 for a game and $1 for a DVD or $1.50 for a Blu-ray -- “you entertain an entire family for a whole day,” he said. He said games will represent about 10 percent of the title mix. In four cases out of ten in test markets, when a game was rented, a movie was also added to the cart, Davis said. “And people typically will hold onto a game a bit longer than a rented movie,” he said. If that plays out nationally, “it should be beneficial to us,” he said.

Coinstar remains committed to rolling out a Redbox digital offering in 2011, Davis said. He didn’t give a timetable or details. The company is continuing “to build out the level of infrastructure to support a successful digital launch,” he said.

Blu-ray remains a relatively low percentage of the overall revenue mix for Redbox. It was down in units from Q4 but about the same as percentage of revenue, Di Valerio said. The company was able to “better utilize the Blu-ray inventory by matching up demand as we moved into Q1,” he said. “We're getting the proper mix so we can yield more out of the Blu-ray discs that we have.” Demand for physical discs, meanwhile, will “remain strong,” with about 80 percent of U.S. households owning either a DVD player or Blu-ray player, Davis said.

Redbox market share on a unit basis grew 9.3 percentage points to 33.2 percent in Q1 from a year earlier, compared with a 19.9 percent share for national brick-and-mortar rental stores. Redbox added 1,600 kiosks last quarter, bringing the total to 31,800 kiosks at more than 27,000 locations, Davis said. He attributed customer growth and loyalty to promotions including a rent-two, get-one free deal and a refer-a-friend campaign.

Tweaks to “kiosk analytics” are attracting new consumers, incentivizing the occasional user, and increasing the basket size of regular customers, Davis said. He cited a light box display on the Redbox kiosk that has a “sweet spot” in the upper left corner. Traditionally, that area has highlighted a new release aligned with the purchasing schedule. Now, the space showcases several titles under a common theme such as “bring home an award winner,” he said. The change generated incremental revenue in Q1, he said.

Despite release schedule timing challenges that Coinstar warned about in its Q4 earnings call and analyst day, the company put in place strategies to address challenges with migration, inventory, and timing, leading to better-than-expected Q1 results, said Di Valerio. Redbox revenue grew 38 percent from a year earlier to $362 million, he said. Although the company “over-purchased” titles in the fourth quarter and into Q1, many of those titles performed “particularly well” during January and February when there was little or no new theatrical content, he said. Redbox saw same-store sales growth of 15.3 percent, he said. The company decreased Blu-ray titles as a percentage of kiosk content to be “more in line with current demand” and allocated Blu-ray content to kiosks that demonstrated the most demand, he said.

Davis said the rental market can support 45,000 to 60,000 locations, a number that could change dramatically depending on what happens with Blockbuster stores. “If there’s a rapid closure of thousands of stores, we would want to make sure that we have those needs met with the appropriate coverage,” he said. On average, Redbox has roughly four kiosks within five minutes of every Blockbuster store, he said. Coinstar is scheduled to roll out 5,000-6,000 kiosks in 2011, “but we revisit that every quarter to see if that’s the right number,” he said.

Coinstar Q1 sales rose 31 percent to $424.1 million from a year earlier. Profit rose 32 percent to $8.5 million. Coinstar shares rose 5 percent at $53.98 on Friday.