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WIKI ANALYSIS
Coinstar (NASDAQ:CSTR) is most known for its coin-counting kiosks in grocery stores. A customer dump coins into a coinstar machine and paper money instead. The company typically charges an 8.9% fee on all coins processed. Although coin-counting is Coinstar's most established business, with their first machines installed in 1992, the company generates most of its revenue from its self-service DVD rental businesses. The business is similar to its coin-counting business, in that customers can rent or buy DVDs from DVD kiosk located places like grocery stores. Coinstar also has a smaller money transfer business that it operates in a similar way.
Despite the struggling economy, Coinstar's coin-counting business has remained stable and its DVD business has grown tremendously. In 2009, the company's net sales increased by 50% and it's net income nearly tripled.[1] However, the DVD rental market is very competitive, especially with the emergence of online streaming rentals. One of the company's competitors, Netflix (NFLX) has as option that allow customers to rent DVDs by streaming it to their computers or TV, something that is more convenient for most people.
Company Overview
Coinstar maintains contracts to place their products in retail outlets, most notably Wal-Mart Stores (WMT), Walgreen Company (WAG), and McDonald's (MCD). These three customers alone account for 40% of Coinstar's revenue.[2] Coinstar's contract with Wal-Mart is very one-sided. The giant retailer has the option of canceling or revising the contract at any time.
The company is organized into two geographical segments. The North America segment includes business from North America, Canada, and Mexico. The International segment is composed of the United Kingdom and other European countries, with the UK providing the majority of international revenue. Over 90% of revenue comes from the United States.
Business Segments[3]
Coinstar operates in four main business segments:
- Coin Services (23% of net revenue): Coinstar is in the self-service coin-counting market. They operate an automated network of coin-counting machines placed within retail establishments. Customers feed loose change into the machines, which count the coins. The customer can receive a voucher good for the value of coins counted, less an 8.9% transaction fee. Alternatively, they can receive a value card or e-certificate to a partnering retailer, such as Starbucks, Amazon.com, or iTunes. In this event, Coinstar receives the 8.9% from the partnering retailer, and the customer does not pay a fee. The total dollar value of coins processed through the Coinstar network is typically around $2.9 billion annually. The company operates more than 19,000 coin-counting machines in the US, Canada, Ireland, and UK, most of which are located in places like grocery stores.
- DVD Service (67% of net revenue): Coinstar operates a self-service DVD rental business where customers can rent or purchase movies from DVD kiosks. The company operates more than 22,000 kiosks in grocery stores, mass retailers, drug stores, and convenience stores. Coinstar operates this business through its subsidiaries Redbox and DVDXpress. Coinstar has reached licensing agreements with Sony, Lionsgate, Paramount, and Warner.
- Money Transfer Services (8% of revenue): the company offers money transfer services with a network of almost 50,000 locations through its subsidiaries Coinstar Money Transfer and GroupEx.
- E-Payment Services (2% of net revenue 2009): Coinstar formerly offered an e-payment business until it was sold in Q2 2010[4]
Business Growth
FY 2009 (ended December 31, 2009)[1]
- Net sales increased 50% to $1.14 billion. The increase was driven primarily by the company's DVD segment from the installation of 8,700 net DVD kiosks. Net sales in the segment doubled to $733 million and same-store sales grew by 28%. Sales growth was offset by a 1% sales decrease in the company's coin services business.
- Net income nearly tripled to $53.6 million from $14 million last year.
Trends and Forces
Elimination Threat of The Penny Changes Coin-Counting Habits
Over half of the coins processed through Coinstar machines every year are pennies.[5] However, there is talk in Congress of removing the penny from circulation. The Legal Tender Modernization Act, and the Currency Overhaul for an Industrious Nation Act were both efforts to eliminate the penny, but neither act passed.
The elimination of the penny would affect how people count their coins. People would accumulate less coins, and need to use coin-counting services less frequently. On the other hand, the revenue per coin-counting transaction would increase, given the higher average coin value. Overall, without the penny, people would change how they use machines such as Coinstar. Coinstar is a large supporter of the penny.
Relationship Changes with Wal-Mart and other Big Retailers Affect Operations and Results
Coinstar places many of its coin-service and DVD kiosks at big retail stores like Wal-Mart (WMT). This benefits Coinstar because it increases traffic flow around its kiosks, which typically results in more transactions. Retailers benefit by getting a service fee.
Coinstar's largest retail customers are Wal-Mart (WMT), Walgreen Company (WAG), and McDonald's (MCD). Coinstar collects 30% of its revenue just from these three retailers. The company signs a contract with each retailer, but since these retailers are huge and have a lot of purchasing power, the contracts can be terminated at any time. If any of these retailers were to cancel their contract to have coin-service or DVD kiosks in their stores, Coinstar would have trouble filling in the lost revenue.[2]
Switch to Free Alternatives Hurts Coin-Counting Revenue
Coinstar charges 8.9% per coin-counting transaction. Some banks and other competitors already provide coin-counting free of charge, or for a lower percentage fee. Commerce Bank offers a free coin counting service, Penny Arcade. Chevy Chase Bank also offers a free service, Change Express. Consumers prefer these free services. An expansion of these coin-counting services by any competitors could hurt the results of Coinstar's operations. People will be less likely to use Coinstar machines, severely hurting coin-counting revenue.
Emergence of Online Video Affects Physical DVD Rentals
The Online Video market is rapidly growing. In December 2009 alone, Americans watched 33 billion videos.[6] There are many options for streaming and sharing videos over the internet, such as Google's YouTube and Hulu.
Coinstar participates in the Physical DVD rental market. If consumers transition away from DVDs and towards these online mechanisms, Coinstar stands to lose. If people can stream movies over the internet, there becomes less reason to rent. One of Coinstar's competitors, Netflix (NFLX), offers an option that allows people to stream videos straight to their computer or TV, giving it an advantage over Coinstar.
Competition
Coinstar is a company that operates in multiple, distinct segments. They have different competitors and various competitive advantages in each segment. One overall advantage is that Coinstar is an integrated provider of payment and entertainment services.
Coin and Currency Services
- Global Payment Technologies (GPTX) Global Payment Technologies manufactures and sells currency validation systems. In addition to Coin Counting, GPTX specializes in paper currency counters.
- Cummins-American Cummins-American is a privately owned company. They make and distribute coin and currency sorters, counters, and dispensers. Their products are sold worldwide to banks and government agencies, as well as within the retail and vending industries.
E-Payment Services
- Cash Technologies Cash Technologies develops and markets data processing products for the financial services industry. The company's CashTechCard System establishes and manages debit card programs. They issue prepaid debit cards, rivaling Coinstar's E-Payment offerings.
- Western Union Company (WU) Western Union is the largest company in the money transfer industry. They carry out approximately 400 million payment transactions each year. Coinstar's money network contains approximately 5,000 send, and 25,000 receive locations. Western Union operates more than 335,000 locations worldwide. They earn the 85% of their revenues from consumer-to-consumer transactions.
DVD Rental
- Blockbuster (BBI) Blockbuster operates a network of entertainment-related rental stores. Their offerings include videos and DVDs, as well as video games. They also offer movie rentals through the internet and by mail. They operate over 7,800 stores in the United States. Blockbuster does not operate any DVD kiosks.
- Netflix (NFLX) Netflix offers DVD rental subscriptions over the internet. Movies are delivered through the mail, steering consumers away from physical DVD stores. They additionally let customers to watch select content instantly on their computers. Their rental options differ from Coinstar's kiosk model.
Notes
- ↑ 1.0 1.1 CSTR 2009 10-K "Selected Financial Data" pg. 25
- ↑ 2.0 2.1 CSTR 2009 10-K pg. 5
- ↑ CSTR 2009 10-K "Business" pg. 3-4
- ↑ Reuters "UPDATE 1-Coinstar sells e-payment business, cuts Q2 outlook" 26 May 2010
- ↑ [http://www.newyorker.com/reporting/2008/03/31/080331fa_fact_owen New Yorker "Penny Dreadful" 31 March 2008
- ↑ ComScore "U.S. Online Video Market Continues Ascent as Americans Watch 33 Billion Videos in December" 5 February 2010
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