Coinstar: Diversification Through Coffee Kiosks Is Only The Beginning

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Shares of Coinstar (NASDAQ:CSTR) traded close to 4% up on Tuesday night after a major announcement by the company. Coinstar expanded its partnership with Starbucks (NASDAQ:SBUX) owned brand Seattle's Best. A kiosk called 'Rubi' will now be rolled out and expanded nationwide in 2012.

The company will roll out 500 Rubi kiosks before the end of 2012, with thousands to be added later. The kiosk will prepare freshly ground and brewed coffee on the spot for consumers, offering them the convenience of price, location, and a short waiting time. The machines offer coffee, lattes, and mochas to consumers. The prices for machine-brewed coffee are to start at $1.00 per cup.

In its May Analyst Day Presentation, the company reported that the 53 test kiosks saw a run-rate revenue of $11,000 to $12,000 on an annual basis. Coinstar listed 500 kiosks as the goal for 2012, with 15,000 as a potential long-term kiosk number for Rubi. I like this deal for Coinstar, as it further diversifies the company.

Coinstar started with a simple business of kiosks to count people's spare change and charge them a fee to do it. The company then expanded through its acquisition of a DVD rental kiosk business, which now makes up the majority of its revenue. Coffee is an addiction for many consumers and having it conveniently placed in kiosks in heavy traffic areas could be a big revenue draw for Coinstar. Test locations saw over $10,000 per machine on an annual basis, which would represent a long-term potential of $15 million in additional revenue five to ten years down the road.

Seattle's Best branded coffee has been around since 1970. The brand was franchised in 1998 and eventually purchased by Starbucks in 2003. The company has had relationships with Borders book stores, Barnes and Noble (NYSE:BKS), Burger King, Delta Air Lines (NYSE:DAL) and Royal Caribbean (NYSE:RCL). Before the vending machine deal, there were over 50,000 places where you can find Seattle's Best Coffee.

Earlier this month, Coinstar announced deals to bring its Redbox movie rental kiosks to Dollar General (DGO) and Family Dollar stores across the country. The announcements expand on Coinstar's push into the growing value retail outlets. The two moves add over 10,000 locations for Redbox kiosks across the United States. The goal was to add 1,800 to 2,400 Redbox kiosks through partnerships with CVS Pharmacy (NYSE:CVS) and dollar stores throughout the United States.

Other new kiosks being tested by Coinstar are:

  • Gizmo, which offers 43 different electronic products, including refurbished tablets, phones, and video game consoles, in less than five locations currently. Gizmo will expand to over 100 locations in 2012. Coinstar has listed Gizmo potential for 2,000 locations.
  • Star Studio, which is an interactive photo shoot aimed at teen girls, in nine locations. Coinstar lists 4,000 as a long-term potential for the kiosk brand.
  • Beauty , dealing with beauty products in a kiosk.
  • Prepared Food-on-the-go food offerings.
  • Alula, a kiosk to trade in unused gift cards for cash.

Coinstar has also made investments, with partial ownership stakes, in two other kiosk concepts:

  • EcoATM - pays cash for recycled cell phones, in over 60 kiosks in California right now. EcoATM will have over 100 kiosks in 2012 and will be expanding heavily in 2013-2014. In the next two years, there will be thousands of EcoATM kiosks around the country. Coinstar has listed this kiosk as a great international expansion potential.
  • SoloHealth - health risk analysis.

The company's objectives for 2012 include:

  • Drive innovation in core businesses (Coinstar, Redbox)
  • Invest in the infrastructure to support growth
  • Expand testing and launch one to two concepts
  • Expand in Canada
  • Continue to drive profitable growth

Coinstar's coin counting machines have seen several upgrades and been involved in partnerships in recent memory. The company has partnered with eBay's (NASDAQ:EBAY) Paypal to allow consumers to deposit coins and cash into Coinstar machines to load a Paypal account. Paypal members can also withdraw from their Paypal account via a Coinstar kiosk. Other options for cashing in coins allow consumers to donate the money to charity or take the coins in the form of a gift card, to avoid coin cashing fees.

The Redbox unit has seen a partnership with Verizon (NYSE:VZ) earlier in the year and an acquisition of a rival's kiosk business. Redbox kiosks began renting video games last year. The kiosks will continue their expansion into Canada throughout 2012. The company is building Redbox sales through four key areas:

  • Same Store Sales
  • New Locations
  • Digital
  • New Business

Redbox also continues to grow through the internet by customizing users' weekly emails. The company is gaining valuable email addresses and Facebook 'likes' daily that further expand customer interaction with the company. Smartphone applications are also used to see what movies are available and reserve releases when they come out.

Canaccord recently upgraded shares of Coinstar to a 'buy' rating on new business opportunities for the company. The company also saw Redbox's market share growing, with additional Blockbuster closings and Netflix subscriber losses.

Shares were trading above $60 in after-hours trading late Tuesday night, based on the Seattle's Best kiosk deal. I would not be surprised to see the shares hit a new fifty-two week high ($69.74) within the coming weeks. I have never owned shares of Coinstar, but think with all of the new kiosks in the pipeline, the company is an attractive long-term buy.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSTR over the next 72 hours.

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