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Varun Gupta
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Graduated from University of Michigan with degree in Economics and Financial Mathematics.
  • Coinstar: The Perfect Acquisition Target For Groupon? 0 comments
    Jun 21, 2013 5:12 PM | about stocks: OUTR, GRPN

    I can almost see the press release.

    Bringing great value to customers; Groupon acquires Coinstar.

    With Groupon's (NASDAQ:GRPN) recent stock rally, Groupon should be looking at potential acquisitions that would help Groupon distribue deals.

    Coinstar generates more than 80% of it's revenue from Redbox DVD rental kiosks. While most people see Coinstar as a good cash flow company in a dying market; Groupon should see Redbox as a fantastic growth opportunity.

    Coinstar would fit in well with Groupon. Kiosks and collective buying are both innovative ways of bringing discounts to customers. Both strategies work on the principle that high volume sales allow for consumer savings. An acquisition would provide great synergies in branding and advertising and instantly give Groupon a physical presence nationwide.

    Strategic benefits for Groupon:

    1) Nationwide Advertising Presence

    - There are more Redbox machines in the US than Mcdonalds and Starbucks.... combined (35,000+ Redbox kiosks)(link)

    A good deal is hard to pass up, unless you didn't know it existed in the first place. Groupon needs to be aggressively exploring ways of putting deals in front of as many eyes as possible.

    Redbox would provide Groupon a customer base with great advertising potential. Redbox has succesfully grown a base of returning value oriented customers. These are the same type of people that would be enticed into buying Groupon's deals.

    Redbox machines are already located in areas to maximize foot traffic and logistically would be easy to remotely update and monitor deals via internet connection.

    2) Advertising....with instant sales

    - In 2013 Q1, Redbox had 40 million unique credit cards (link)

    - 17+ million smartphone customers, 4+ million mobile subscribers, 5+ million social media fans (link)

    Redbox just happens to have the very three pieces of data that Groupon needs from customers: location, credit cards, and e-mail.

    The best part about advertising on Redbox machines is the chance to sell to someone already in the process of making a purchase. A simple screen before checkout could allow customers to add Groupons with 1-click. A lot better than the 5-10 clicks it takes to open apps, get to Groupon app, click a deal, confirm purchase..etc.

    Coinstar is already starting to explore the potential of Redbox machines as a point of sales for local event ticketing.

    "With the introduction of Redbox Tickets, we see Redbox becoming a new point of discovery for local events and attractions - a win for consumers, venues, inventory owners, Redbox and Redbox retail partners,"

    - Mark Achler, senior vice president of new business, innovation and strategy, Redbox.

    Sounds pretty similar to how Groupon views themselves as point of discovery for local merchants and businesses.

    They might even want to lower DVD costs to draw in customers and sell them the more profitable Groupon deals. Or why not have a Groupon for DVD rentals, $20 for 2 rentals/month for a year. Or to Groupon that means 12-24 more chances to sell deals.

    3) Brand Development

    - 355 million people see Redbox machines every week (355 million impressions per week)(link)

    The final step for Groupon in unlocking value from Redbox would be getting people to think of Groupon every time they see the machines. Three hundred million people a week seeing a Groupon logo would be more valuable for Groupon than the sales potential from Redbox.

    This could be as simple as adding stickers of the Groupon logo to Redbox machines that gets updated to show deals. Or, it could go so far as to completely rebrand Redbox. Imagine 300 million people a week seeing the Groupon logo on a green kiosk. It could be called Groupbox to help build Groupon(line) as a value brand.

    Addressing the Elephant in the Room - the Decline of DVDs

    Coinstar is being undervalued based on the foreseeable decline of DVDs. It's hard to argue that DVDs will eventually be phased out as technology advances. However, the impact on Coinstar's business is overly pessimistic. DVD sales will be far more impacted then DVD rentals.

    Streaming movies sales are already priced similarly to DVDs, in the $10-15 range (Amazon DVD vs Streaming) and streaming movies can't break on you. Streaming rentals, on the other hand, are currently priced at $3-5/day compared to the $1.25 for renting DVDs through Redbox. Even if prices came down, the blockbuster hits Redbox focuses on would be priced at the higher end online.

    I feel that as long as Redbox can keep it's better value, people won't throw away their DVD players. And the move towards a secondary revenue source on Redbox machines would allow for future discounts to preserve that value proposition.

    At the very least Redbox give the company enough time to test other kiosk concepts and/or wait for better technologies. While DVDs will eventually decline,

    Acquisition or Partnership - A deal for Groupon

    The question Groupon should be asking is which makes more sense, a partnership or an acquisition. A simple revenue sharing partnership would be both low-costing to implement and potentially profitable for both companies. But if Groupon really wants to be the leader in local sales, now would be the best time to buy Coinstar, while it's being undervalued by the market. There are a couple potential catalysts that could send Coinstar shares soaring.

    In Conclusion

    I believe that Coinstar is a good stock for investors because it has high upside potential and low downside. Coinstar is undervalued at $60 because the market isn't pricing in the full advertising and sales potential of Redbox. Groupon's business and goals make it the best partner to realize that potential, but either way investors will be rewarded once Coinstar figures out additional monetization methods for Redbox.

    In fact, if Groupon is to slow, Livingsocial could acquire Redbox for many of the same reasons. I just think the visibility of Redbox would be more valuable reinforcing Groupon's already established brand and leader status.

    A Groupon acquisition of Coinstar would go a long way towards expanding customer reach and building Groupon as a value brand. It's short-sighted (no pun intended) to look at Coinstar as a DVD rental company, when they are an Automated Retail Solutions company that just happens to sell DVDs.

    After all, doesn't it make sense that we'd see a 3D printing kiosk before a home 3D printer? And who else would General Electric (NYSE:GE) or 3D Systems (NYSE:DDD) partner with to develop and distribute their technology?

    Disclosure: I am long CSTR.

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