Starbucks Signs a Deal with Coinstar

Coinstar Inc. (CSTR) and Starbucks Corp. (SBUX) have entered an exclusive five-year agreement to open several thousand coffee kiosks in the U.S., brewing cups of Seattle's Best brand coffee for just a buck each.

The companies will be rolling out kiosks named Rubi in grocery stores, drug stores and mass retailers. While financial details of the deal weren't disclosed, Coinstar won't be able to sell other brands' coffee in kiosks through these channels and Seattle's Best won't be able to open its own vending stations under the terms of the deal. If the agreement is successful, the companies have the option to extend it.

The machines are part of the most advanced of Coinstar's new ventures outside coin-counting machines and Redbox DVD-rental kiosks. They will sell Seattle's Best coffee--a Starbucks brand--for $1 a cup and make fancier cafe drinks for $1.50 each. With just over 50 vending stations in operation so far, Coinstar sees potential for more than 15,000 locations in the U.S.

In after-hours trading, Coinstar's stock rose 3.4% to $61.33 a share and Starbucks edged up 0.2% to $52.51.

While automated-food retailing isn't very popular in the U.S., it has taken off in other countries such as the U.K. and Japan.

"The U.S. has lagged other parts of the world in automated retail; and we are at forefront of this trend coming to the U.S.," said Jim McDermet, senior vice president and general manager of Seattle's Best. "We believe that there is certainly an international opportunity, as well, though it's not part of this deal."

Coinstar Chief Executive Paul Davis agreed the coffee-kiosk business has a clear ability to expand beyond the U.S. Expanding Redbox overseas has been a frequent topic on investors' minds, but the company often has said variations in consumer habits make the international scope of DVD rentals tricky.

The kiosks will begin rolling out this summer in earnest with plans to reach 500 by the end of the year. The kiosks offer seven hot drinks available in one size, but Mr. Davis said the companies would explore offering two sizes as well as seasonal flavors as they roll out this year. They could evolve to iced beverages as well.

Mr. Davis, who previously worked at Starbucks as North America president, said channels included in the deal are ones where the company has the most history. "We would expect to have a really strong share in those channels because that is where we have the most time and expertise," he said. But he sees the opportunity for the kiosks to move Coinstar into new channels like colleges and hospitals.

Mr. Davis said the deal and official launch of Coinstar's coffee business also are an endorsement of a development process the company began several years ago to diversify an operation that is increasingly reliant on Redbox-DVD rentals, a format that faces a long-term decline.

Seattle's Best has been working to reimage its brand the past couple years, especially as Borders, which had been the biggest retailer of its coffee, closed its doors following a high-profile bankruptcy process. Seattle's Best has spent the past 12 months looking for other outlets, and is sold on all Delta Air Lines Inc. (DAL) flights and at restaurants such as Subway, Burger King and Yum Brands Inc.'s (YUM) Taco Bell.

Smaller footprints have been another major focus. The Rubi kiosks take up about nine square feet. "This is the next evolution of the strategy we've been talking about," Mr. McDermet said. "We want to ensure that our coffee is being sold in ways that are more approachable, accessible and affordable. That's where Coinstar fits in."

With revenue per kiosk targeted at about $11,000 to $12,000 a year, annual revenue would represent up to about $180 million if the business ramps up to the full target of 15,000 locations.

But even at that level, said Douglas Greiner, a Compass Point analyst who covers Coinstar, the coffee business "still has a ways to go" to rival the heft of Redbox, which accounts for the lion's share of Coinstar's revenue and drives its robust growth.

Annual sales of $180 million would still fall short of those of Coinstar's staid coin counters, which generated $282 million in revenue last year, Greiner noted. By comparison, Redbox revenue was $1.56 billion last year.

With the coffee business, Coinstar is applying techniques learned from its coin and Redbox machines. Based on email addresses it collects to send electronic receipts to--a practice at Coinstar's other businesses--the company plans to develop a "coffee club" loyalty program offering special promotions, which it can use to track members' purchase patterns.

Seattle's Best is looking at options for cross-promotion of other brands like Delta Air Lines that serve its coffee, or giving kiosk customers coupons for Seattle's Best packaged coffee, "but we haven't even really scratched the surface of those possibilities yet," Mr. McDermet said.

From: foxbusiness.com