By Michael White
October 18, 2012
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Coinstar's automated barista
Photo courtesy: Coinstar/Bloomberg
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Coinstar (CSTR),
which helped topple Blockbuster with its $1-a-day Redbox DVD kiosks, is now
trying the same approach in the coffee market, installing dispensers to pump
out cheap, fresh-brewed mochas and lattes at the corner store. The bright red
Rubi box, standing 81 inches high and occupying 9 square feet, grinds arabica
beans from Starbucks’s (SBUX) Seattle’s
Best Coffee brand and brews a fresh 12- or 16-ounce cup of java through a
one-minute process that mimics a French press. Coinstar managers view the
$28.5 billion out-of-home coffee market as ripe for a player that can
offer the same features that made Redbox the largest U.S. DVD rental service:
low prices and convenient locations.
“The coffee market is
enormous,” says Ken Redding, a Starbucks veteran who is general manager of
Rubi. “The market is very much about convenience and desire. We’ve built a
platform that can be in arm’s length of desire.”
Redding expects each
machine to serve as many as 28 coffees and lattes a day, with a simple cup
fetching $1 to $1.50 and specialty drinks $1.50 to $2. At those prices—up to
$1.50 less than Starbucks for a latte—Coinstar is going after price-conscious
shoppers. Coffee-sipping Americans on average spend about $5 a workday for
their lattes and mochas outside the home, or $1,092 a year, according to
Accounting Principals, a researcher in Jacksonville, Fla. That’s led everyone
from gourmet chains, including Starbucks and Peet’s Coffee & Tea (PEET),
to fast-food chains such as McDonald’s (MCD) and
Dunkin’ Donuts to hawk java.
Coinstar may
eventually install as many as 15,000 Rubi kiosks. While that might generate
sales of $200 million a year, according to Eric Wold, a B. Riley analyst in San
Francisco, Rubi is unlikely to disrupt the coffee market the way Redbox upended
DVD rentals. One reason: more competitors. Another is that unlike DVDs, coffee
quality can vary depending on where you buy it, says Wedbush Securities analyst
Michael Pachter. “With Redbox you could get a DVD as cheaply as a dollar, and
you’ve got exactly the same thing you got on video on demand for $5, or that
you paid $5 for at Blockbuster,” Pachter says. “There is a distinct difference
in the quality of coffee you get out of a machine and the coffee you get at a
Starbucks.”
Research from a test
of 50 kiosks this summer at food retailers including Safeway (SWY) and
Harris Teeter Supermarkets showed 40 percent of coffee kiosk customers made it
a habit to stop at the markets just to buy Rubi coffee, Redding says. Becoming
destinations for lower-cost java puts Rubi in competition with McDonald’s and
Dunkin’ Donuts, which have similar pricing, as well as gas stations and
convenience stores. The revenue Coinstar would get from coffee would reduce its
dependence on Redbox rentals, which accounted for 85 percent of its
$1.85 billion in revenue in 2011, Wold says. Coinstar’s namesake
coin-counting machines accounted for 15 percent of sales. Redbox also has
forged a partnership with Verizon Communications (VZ) to
start an online movie streaming service by yearend.
The coffee venture
also is an opportunity for Starbucks to expand the Seattle’s Best Coffee brand
after the closing of Borders Group bookstores, which had almost 500 Seattle’s
Best cafés before the company was dissolved during bankruptcy last year,
according to Jim McDermet, general manager of Seattle’s Best. Coinstar is the
sixth retailer to sign an agreement to serve Seattle’s Best Coffee, including Burger
King Worldwide (BKW),
Subway restaurants, and AMC Entertainment Holdings theaters.
The
bottom line: Coinstar, the
No. 1 DVD rental chain with its Redbox kiosks, is now trying to crack the $28.5
billion out-of-home coffee market.
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White is
a reporter for Bloomberg News in Los Angeles.