Coinstar Inc., the company that toppled Blockbuster with $1-a-day Redbox DVD kiosks, is turning its formula on the coffee market, installing dispensers to pump out cheap, fresh-brewed mochas and lattes at the corner store.
The bright red Rubi box, occupying 9 square feet and standing 81 inches high, grinds arabica beans from Starbucks Corp. (SBUX:US)’s Seattle’s Best brand on the spot and brews a fresh 12-or 16-ounce cup of java through a press in 1 minute. The company is testing 12 drinks and will settle on seven, including hot chocolate, priced at $1 to $2 each.
Coinstar is trying to break into the $28.5 billion out-of-home coffee market by offering convenience and a low price: features that made Redbox the largest U.S. DVD rental service and drove Blockbuster Inc. into bankruptcy two years ago. The goal is to expand the premium market by serving coffee where it isn’t now, including drug stores and big-box retailers.
“The coffee market is enormous,” said Ken Redding, Rubi’s general manager. “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 of joe fetching $1 to $1.50 and specialty drinks $1.50 to $2. At those prices, Bellevue, Washington-based Coinstar is appealing to a price-conscious shopper. In Los Angeles, Starbucks charges $1.65 for 12-ounce coffee and $1.95 for 16 ounces. Lattes fetch $2.75 and $3.55 in those sizes.
One early adopter is Safeway Inc. (SWY:US), the second-largest U.S. grocery chain, which signed up for some of the initial 50 installations. Coinstar and Pleasanton, California-based Safeway won’t put Rubi dispensers in stores that already have Starbucks cafes.
Teena Massingill, a Safeway spokeswoman, declined to comment, citing a policy of not discussing specific products or services. Harris Teeter Supermarkets Inc. (HTSI:US), a Matthews, North Carolina, chain that’s also testing Rubi, didn’t respond to requests for comment.
Coffee-sipping Americans on average spend about $5 on a typical workday for their lattes and mochas outside the home, or $1,092 a year, according to Accounting Principals, a Jacksonville, Florida-based researcher. Gourmet chains, including Seattle-based Starbucks and Peet’s Coffee & Tea, have led other retailers, such as McDonald’s Corp. (MCD:US) and Dunkin’ Donuts (DNKN:US), to offer espressos, lattes and cappuccinos.
Coinstar has been toiling for at least three years to find a way into the market, developing a so-called reverse pressure system that mimics a French press and technology to control machines remotely, according to the company. Company employees will keep Rubis stocked with beans, cream and sweetener.
“American consumers have moved from buying the worst quality in the world to buying among the best coffee in the world,” said Redding, who left Starbucks in 2009 to lead the Rubi venture.
Coinstar may eventually install as many as 15,000 Rubi kiosks, Redding said. While that might generate sales of $200 million a year and help the company diversify its revenue sources, analysts say Rubi is unlikely to disrupt the coffee market the way Redbox upended DVD rentals.
One reason is that there are more competitors. Another is that unlike DVDs, coffee choice is a matter of personal taste, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles who has an “outperform” rating on Coinstar shares.
“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 said. “There is a distinct difference in the quality of coffee you get out of a machine and the coffee you get at a Starbucks.”
The primary consumer will be individuals with household incomes of less than $50,000 a year, according to Redding. Starbucks, based in Seattle, targets people earning $75,000 or more a year, he said.
Supermarkets will share revenue generated by Rubi, just as they get some of the Redbox DVD rentals and proceeds from Coinstar’s namesake coin-counting machines, Redding said. The company yesterday announced a new vending machine initiative: sales of tickets to live events through Redbox machines in Philadelphia. It will expand to Los Angeles in early 2013.
Coinstar rose (CSTR:US) 2.7 percent to $46.89 at the close in New York and is up that much for the year. Starbucks slid 0.8 percent to $49.10 and Safeway advanced 2.1 percent to $16.35.
For supermarkets that don’t have Starbucks or other gourmet coffee cafes, Rubi offers a premium service that helps them compete with rivals who do, said Karen Short, a New York-based analyst for BMO Capital Markets.
Starbucks, with its higher-end clientele, has probably expanded as far as it can in grocery stores, so Rubi offers the opportunity to keep growing, she said.
“Rubi would accomplish the same thing,” Short said.
The initial introduction will be concentrated in the U.S. Northeast and West Coast, according to the company. Research from the initial rollout of about 50 kiosks that started in the second quarter showed that the appeal goes beyond impulse buying, with 40 percent of customers making it a habit to stop at supermarkets just to buy Rubi coffee, Redding said.
Emerging as a destination for lower-cost coffee may put Rubi in competition with McDonald’s and Dunkinâ Donuts, outlets that have similar pricing, as well as gasoline stations and convenience stores, Redding said.
With 15,000 machines, Rubi would generate about $200 million a year, based on $12,000 a year per dispenser, according to Eric Wold, a B. Riley & Co. analyst in San Francisco who recommends buying the stock. That would amount to about 7 percent of Coinstar’s 2013 sales, which he estimates at $2.6 billion. The rollout will take several years, Wold said.
The extra revenue (CSTR:US) will reduce Coinstar’s dependence on Redbox DVD rentals, which accounted for 85 percent of the $1.85 billion in revenue in 2011, Wold said. Redbox also has forged a partnership with Verizon Communications Inc. to start an online movie streaming service by year-end to further diversify as the DVD rental market declines. The namesake coin-counting machines accounted for 15 percent of sales.
The venture is also an opportunity for Starbucks to expand the Seattle’s Best brand after the closing of Borders Group Inc. bookstores, which had almost 500 Seattle’s Best cafes 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 Inc. (BKW:US), Subway Restaurants and AMC Entertainment Holdings Inc. (AMC:US) theaters, McCabe said in an interview. Seattle’s Best has been looking for partners since the Borders Group liquidation.
“We look at our relationship with Coinstar as really a next logical step in making great coffee accessible to folks that historically haven’t been able to find a great cup in places that they frequent,” McDermet said. “They’re choosing that coffee based on where they’re located, whether in gas stations, or convenience stores and quick-service restaurants.”
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