Redbox Finds Its Niche
2007-05-24Four years ago, Redbox tried to wow the Washington region with high-tech kiosks that dispensed such necessities as milk, eggs and portobello-and-goat-cheese sandwiches, billed as vending machines of the future. Next to them were new DVD rental machines -- added almost as an afterthought.
The automated convenience stores quickly flopped. Parent company McDonald's shuttered the four locations in Northwest Washington, Bethesda and Baltimore-Washington International Airport in less than 12 months. But it held on to the 12 self-service DVD machines in the area, saying they attracted customers.
Now the afterthought is becoming big business. There are more than 350 Redbox DVD vending machines in the Washington area, the most in any of the company's markets. There are more than 3,000 Redbox kiosks across the country, many of them in supermarkets. The Entertainment Merchants Association this month ranked it the fifth-largest DVD rental company in the country by revenue. And it's quickly gaining market share in several key big cities.
''We've just been growing like crazy,'' said Greg Waring, vice president of marketing for Redbox, which is based in Illinois.
The company has bounced back from its early missteps to become a growing niche industry. The number of its DVD rental kiosks is expected to rise to more than 9,100 by the end of the year, according to Adams Media Research, a market research firm. It estimates that customers spent about $73 million renting DVDs from kiosks last year.
The kiosks have a long way to go if Redbox wants to become a serious contender against such players as Blockbuster and Netflix. But they are helping Redbox carve out a market by partnering with grocery stores, many of which long ago abandoned attempts to rent movies.
Competition among the kiosk sector's biggest players to sign up big-name chains has been fierce. Coinstar, which operates coin-counting machines, joined McDonald's in the Redbox venture in November 2005, investing nearly $20 million. Two months later, the company locked up the local Giant Food chain and its sister banner, Stop & Shop. It signed up Giant Eagle, Albertson's, Supervalu and more than a half-dozen smaller supermarket chains and local restaurants over the next year.
The second-largest player is The New Release, which has about 2,000 locations. The Houston company boasts deals with Food Lion, Publix and Kroger. DVDPlay, headquartered near San Jose, has about 1,200 kiosks and has partnered with Safeway. There are 43 DVDPlay kiosks in Safeway stores in the Washington area.
Supermarkets are attractive to the companies because of their heavy foot traffic and frequent repeat customers. The kiosks are usually positioned after the registers, encouraging shoppers to pick up DVDs on their way out. All three companies said they are exploring other channels, such as convenience stores and gyms.
''We've just scratched the surface,'' said Richard Cohen, The New Release's chief executive. ''We could have our hands full in the supermarket channel for many years.''
The operations function similarly. Redbox and The New Release charge about $1 per day for rentals; DVDPlay costs $1.49 the first day and 99 cents each additional day. The transactions take no more than a few minutes and require a credit or debit card. Redbox's latest models carry about 80 titles, focusing on new releases. The New Release carries 100 to 200 titles per kiosk, with a few machines holding about 700. Cohen said the kiosks include new titles and standards such as the ''Star Wars,'' ''Terminator'' and James Bond series. DVDPlay typically features 45 to 60 titles.
There are no late fees because rentals are charged by the day. Maintenance and stocking are handled by third parties, which means there are no clerks dedicated to overseeing the machines at all times.
The companies generally provide the grocers with a set percentage of the kiosk's revenue. According to Adams Media Research, kiosks average 49.1 rentals per day and $37,457 a year in revenue.
''They've really done a tremendous job in expanding their locations and building their business,'' said Sean Bersell, vice president of public affairs for the Entertainment Merchants Association.
Still, kiosks represent a sliver of total DVD rentals -- about 0.9 percent, according to Adams Media Research. Chain video stores continue to dominate the category with 43 percent of the market, while online agencies such as Netflix command about 16 percent.
Russ Crupnick, senior industry analyst at consumer research firm NPD, said the kiosks target impulse shoppers. They cannot match the number of titles that Netflix has or replicate the experience of browsing a Blockbuster. Although he acknowledged that kiosks were rapidly growing in number, Krupnick said they were unlikely to prove a real danger to the established players.
''There's only so many movies that people can watch in a week,'' he said.