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Direct Marketing and Distribution:
The Case of Redbox
Brian A. Vander Schee,1 Timothy W. Aurand, Jennifer Iacovelli,
Jerry Jednoroz, Jeffrey Bergren, Lisa Keller and Matthew Taylor
Aurora University1 and Northern Illinois University
Teaching concepts in direct marketing and distribution can be interesting
and rewarding. Using a case that highlights advances in direct marketing
technology and offers significant customer value can help overcome lack of
currency and integration of direct marketing and distribution strategies in
the introductory marketing curriculum. The Redbox case provides a
contextual background for using direct marketing via kiosks, re-engineering
of their functionality and advances in distribution to make the product offer
attractive and profitable. Follow up class discussion questions (Teaching
Note available from the authors) focus on analyzing growth and efficiency
opportunities as well as competitive challenges possible in the future.
Key Words: Distribution, Direct Marketing, Case Study Instruction
Disciplines of Interest: Marketing
INTRODUCTION
Distribution has followed traditional lines from manufacturer to wholesaler and
retailer to end consumer for many years. A main issue has been balancing the
distribution costs associated with customer satisfaction with the resultant increased
revenue. Getting to know customer expectations and the level of importance they
place on various aspects of distribution including delivery speed, convenience,
communication and price is vital. This kind of data can be gathered from secondary
sources or via consumer survey research. Meeting customer needs is clearly a
priority while balancing customer satisfaction with the associated costs can make
distribution both efficient and profitable.
Much advancement, mainly in technology has changed distribution channels
today to the point where marketing intermediaries are left out altogether. Direct
marketing has also changed dramatically in terms of using technology to reach
consumers at the right place and time with the right marketing offer. Redbox, a
video rental company that operates over 30,200 kiosks nationwide, has capitalized
on developments in both areas to become the market leader in the video rental kiosk
Fall 2012 137
industry. A brief background on kiosks, which are used as a means of distribution
and direct marketing will help put the Redbox case in its historical context.
KIOSKS: NOT JUST FOR VENDING ANYMORE
Kiosks are self-contained units, most commonly found in public locations. They
were traditionally used for dispensing consumer goods such as snacks, beverages or
small merchandise items. Thus earlier versions of kiosks were essentially vending
machines. More recent developments have made kiosks more sophisticated by
allowing users to interact through touch screens, sound and motion video [Colle and
Hiszem, 2004].
Kioks reduce costs while delivering better customer service. As a result
consumers have adapted to self-service as a way of life. North American consumers
utilize self-service technology for various transactions. Kiosk revenue grossed $775
billion in 2009 and should surpass $1.6 trillion by 2013 [Ketner, 2009]. Many
consumers actually prefer using a self-serve kiosk than receiving assistance from a
store employee. This is evident in the kiosk video rental industry in particular as
revenue grew 94% in 2009 [Stableford, 2010].
Kiosks have gone beyond the ubiquitous installation of self-service check outs
at most big store or grocery retailers. They are now used in other areas within stores
to supplement service departments to avoid having to hire more employees. For
example, Schnuck Markets, Inc. has installed self-service kiosks in its deli
departments, enabling shoppers to place their orders and have them ready for pick-
up at checkout. These kiosks are not meant as a replacement for the deli employees,
but rather a customer service enhancement. The kiosk reduces wait times, affords
customers more control over their order, recalls customer order history and offers
product suggestions [Mitchell, 2009].
Intel Corporation has also built prototypes of kiosks designed for department
stores. The kiosks recognize a customer when a store reward card or credit card is
flashed in front of the touch screen, greeting the customer by last name. Previous
purchase history is then brought up with the kiosk presenting the latest specials and
promotions for products of likely interest. These kiosks have the ability to suggest
items that may go with items that the shopper is about to purchase. For instance, if
a customer scans a blazer by passing its price tag across a screen, the kiosk may
recommend several styles of pants and shirts to go with it, along with prices and
possible discounts. This is very similar to the typical online shopping experience
[Eisenberg, 2009].
Another prototype in the works is the Virtual Mirror kiosk. Created by IBM and
EZface, the kiosk allows customers to experiment with beauty products such as hair
coloring and cosmetics on the touch screen. A camera on the kiosk takes a picture
of the customer. The customer can then scan the barcode of a product of interest to
see how it would look [Eisenberg, 2009]. Figure 1 shows a Virtual Mirror kiosk
located in a L’Oreal cosmetic wall at retail.
138 Journal of the Academy of Business Education
Figure 1. Virtual Mirror kiosk
Clearly this level of interactivity goes well beyond transactional exchanges
originally associated with product dispensing vending machines. Redbox uses a
similar approach by connecting with consumers online and with kiosks. Although
opportunities for increased interactivity to spur future growth are evident, the
increased cost associated with such enhancements could be a challenge.
THE REDBOX CASE
Company Overview
Redbox Automated Retail, LLC, or more widely known as simply Redbox, is
a wholly owned subsidiary of Coinstar, Inc. Under the leadership of President Mitch
Fall 2012 139
Figure 2. 2009 and 2010 Video Rental Industry Market Share
(Graham, 2011)
Lowe, the company has an expansive collection of over 30,200 kiosk locations
[Coinstar, 2011]. In fact, an estimated 200 million people walk past a Redbox each
week. It is no surprise then that Redbox is currently the leading vendor of DVD
rentals through automated kiosks [“Redbox announces top,” 2009]. Nationwide
distribution includes major retail locations such as McDonald’s, Jewel Osco, Wal-
Mart and Walgreens.
Redbox today has become a market leader, only second to Netflix in the video
rental industry through combining two fast-paced, consumer driven distribution
strategies: direct online ordering and self-service kiosk distribution. Their place
compared to major retail and subscription service competitors such as Blockbuster
and Netflix in 2009 and 2010 is displayed in Figure 2. Redbox continues to make
inroads on the retail brick and mortar operations gaining 9% in 2010 for a total of
28% market share [Graham, 2011; Kane, 2010].
The company’s ability to quickly adapt to fluctuating demand for newly
released movies has given them a clear advantage over the competition. Consumers
quickly embraced Redbox’s new concept of self-service kiosks because of the
company’s location choices and built-in convenience. Redbox used its seamless
140 Journal of the Academy of Business Education
Figure 3. Redbox Kiosk Unit
behind the scene distribution model to carve out a niche in the entertainment
industry.
Rental Process
Each Redbox unit is fully automated and holds up to 630 DVDs. The bright red
units are covered with movie title advertisements, known as boxart, enticing
potential customers to investigate. Once logged in, the touch screen allows easy
access to view titles and overviews of individual movies. By simply pressing, add
to cart and checkout the DVD is dispensed to the customer. Transactions average
20 seconds assuming the rental was determined before approaching the Redbox unit.
A typical Redbox unit is depicted in Figure 3.
When returning the DVD, the customer selects on the touchpad return a DVD
and feeds the DVD in the slot. Again, this transaction only takes a few seconds. The
retuned DVD in the unit is placed back into inventory for availability within eight
seconds of the return. This fast paced, highly flexible automated service handles on
average 70 to 80 transactions per second nationwide on an average Friday or
Saturday evening [Lieberman, 2009]. Theft is minimized in that the Redbox units
Fall 2012 141
Figure 4. Fourth Quarter 2010 Coinstar (Redbox) Financials
2009 (4Q) 2010 (4Q) Change
Video Rental
Revenue $232 mil $320 mil +38%
Operations Profit $29.5 mil $55.4 mil +188%
Operating Margin 12.7% 17.3% +36%
2009 (year) 2010 (year) Change
Total Revenue $774 mil $1.16 bil +39%
Operations Profit $102 mil $193 mil +89%
Operations Margin 13.2% 16.6% +26%
(Coinstar, 2011)
only accept credit or debit card payment and bar code technology is used to record
dispensing and receiving DVDs.
Location and Convenience
All Redbox kiosks are located at or near the entrance of various retail stores.
The daily rental rate is one dollar per DVD. Redbox allows its DVDs to be returned
to any of the Redbox locations. Customers who would like to keep their rental
longer may do so for an additional one dollar per night, up to $25 when Redbox
assumes that the DVD has been purchased.
Redbox’s approach to video rentals has put the buying experience in the hands
of the customer. Each kiosk contains a sophisticated inventory-management system
that determines how many copies of different new titles to order based on past
performance of similar movies at that location [Farhad, 2009]. Generally, Redbox
receives and makes all DVDs available for customers as soon as they are released
for video rental. This is typically 28 days after the video is available for purchase.
Redbox also has patents for both its hardware and software technologies, with a
heavy emphasis on software. The software used in Redbox kiosks was custom
designed and allows inventory analysts to pull real time data directly from units four
to five times a day.
This attention to customer convenience and efficient distribution channel
continues to support the rapid growth in revenue and profit margin. Redbox’s video
rental revenue grew 38% in the fourth quarter of 2010 to $320 million, up from
$232 million in the fourth quarter of 2009 [Coinstar, 2011]. Other Redbox financials
for 2010 are shown in Figure 4.
142 Journal of the Academy of Business Education
Figure 5. Redbox Distribution Channel
Direct Online Ordering
Every Redbox machine is connected to the internet via DSL or a 3G cellular
modem, allowing customers to view and reserve movies online [Farhad, 2009]. Also
incorporated into the Redbox website (www.redbox.com) is the specific availability
of the movies by location. If the desired DVD is not at the location closest to home,
customers may choose to either drive to a different location where it is available or
pick a different movie for the night. After making a pre-paid reservation online the
customer is guaranteed the DVD will be available upon arrival at the unit. This has
simplified the video rental experience through innovative distribution and customer
convenience.
Staffing and Inventory Flow
Success or failure at the box office is a major determinant of the movie’s success
in the video rental industry [Das, 2008]. Therefore, each of the Redbox units are
stocked at least once a week, on Tuesdays, the day that newly released movies
become available. The effectiveness of this model relies on efficient product
distribution. The DVDs are housed in regional warehouses and are sent directly to
the homes of regional field associates that stock the kiosks. The field associates are
a mix of internal personnel who also work in the field with some outsourced
associates. Field associates have the ability to fix the units and are cross-trained on
software troubleshooting. Typically, parts are also mailed directly to the home of the
field associate or the regional warehouse. The distribution model for Redbox is
shown in Figure 5.
Major metropolitan areas maintain internal field personnel that manage the
inventory flow of DVDs. This method is combined with detailed reporting from the
corporate office, instructing exactly what routes to run to maintain optimum
inventory levels.
Movie Studio Distributor
Redbox Regional
Hub
Redbox Field
Associate home
Redbox Units
Fall 2012 143
Figure 6. Netlflix Financials
2007 2008 2009 2010
Subscribers (in thousands) 7,479 9,390 12,268 20,010
Revenues (in millions) $1,205 $1,365 $1,670 $2,162
Net Income (in millions) $67 $83 $116 $160
(“Netflix 2010 Annual Report,” 2010)
COMPETITION
Netflix
Although Redbox has experienced substantial growth, Netflix has kept pace
with its own unique business model. Netflix offers customers unlimited access to
DVD rentals sent by mail based on a monthly subscription rate. The lowest package
currently available is $9.99. This also includes direct streaming of television
episodes and movies via internet connected computers, HDTVs, mobile devices,
Blu-ray players as well as video game consoles including Microsoft’s Xbox, Sony’s
Playstation3 and Nintendo’s Wii. In the third quarter of 2010 two-thirds of all
Netflix subscribers used the direct streaming service [“Netflix facts,” 2010]. In fact,
Netflix now offers subscribers a streaming-only option for $7.99 per month. It is no
surprise then that more than half of all Netflix subscribers stream more content than
they receive in the mail [Kane, 2010]. In 2010 Netflix expanded internationally by
offering the streaming-only option in Canada and expects the operation to be
profitable by the middle of 2011 [“Netflix 2010 Annual Report,” 2010]. Its dual
distribution approach to home entertainment has spurned growth in terms of
customer subscriptions and revenue. Netflix financials for 2010 are shown in Figure
6. Netflix offers an expansive selection with over 100,000 titles on DVD and more
than 15,000 movies online. Operationally Netflix utilizes 58 regional distribution
centers. DVDs typically arrive in one business day including Saturday delivery
[“Netflix investor relations,” 2010]. As is the case with Redbox, availability of
newly released videos for rent is also subject to a 28-day delay after movie release
for retail purchase. Netflix utilizes an online system that makes use of a very
effective adaptation of behavioral targeting. Subscribers receive movie recom-
mendations based on the personal ratings of prior movies and those of other
subscribers with similar interests. This movie recommendation feature is used by
more than half of Netflix subscribers [“Netflix facts,” 2010]. The in-home delivery,
144 Journal of the Academy of Business Education
Figure 7. Blockbuster Express Kiosk Unit
direct streaming and automated payment system, as well as personalized movie
recommendations offer superior customer convenience and value.
Blockbuster
Blockbuster began traditional retail store operations in 1985. It has since added
Video On Demand service with direct streaming on a pay per download basis,
typically $2.99 or $3.99 per feature. Blockbuster By Mail is similar to the business
model utilized by Netflix with 95,000 movie titles available. However, Blockbuster
offers many new video releases at the same time they are available for purchase at
retail, which is typically 28 days before Netflix and Redbox [“Blockbuster by mail,”
2010]. Blockbuster also offers over 3,000 video games through this service with the
lowest package currently available at $11.99 per month. This plan also includes five
in-store exchanges.
In 2008 NCR introduced Blockbuster Express video rental kiosks under a
license from Blockbuster. It uses a reservation and operations system to compete
directly with Redbox. Unique features include online movie recommendations,
Fall 2012 145
Figure 8. First Quarter 2010 Blockbuster Financials
2007 2008 2009 2010 (1Q)
Number of US Stores 5,431 5,212 4,356 3,525
Revenues (in millions) $5,542 $5,288 $4,062 $939
Net Income (in millions) ($85) ($385) ($569) ($65)
(“Blockbuster corporate,” 2010)
more than 950 DVDs per kiosk and movie rentals 28 days in advance of Netflix or
Redbox. However, these select titles are available for a premium of $2.99 the first
night and then $1 for each night thereafter [“The hot list,” 2010]. Blu-ray format is
also available for $3.99 the first night and $1 for each additional night. Current
distribution is also limited with only 7,500 Blockbuster Express kiosks in operation
nationwide.
Blockbuster’s complete access approach may resonate with some customers;
however from a cost standpoint it is not very efficient. In addition, its entry into the
subscription service by mail, direct streaming Video On Demand and kiosk
distribution was simply too late. Blockbuster sought protection from creditors under
Chapter 11 in September, 2010 [“Blockbuster reaches agreement, 2010]. Although
store closures continue to plague the parent company Blockbuster Express is
mounting a challenge against Redbox with plans to add 3,000 more kiosk units in
2011 [Massoud, 2011]. See Figure 8 for an overview of Blockbuster’s financials.
Future Developments
Redbox carries a large overhead cost from switching graphics in and out of its
units once a week. These graphics inform customers about upcoming DVDs and
release dates. Installing a LCD screen at the top of each unit could offer digital
signage for inventory promotion or brand advertising [“NCR lauches,” 2009]. This
technology not only allows them to switch advertising on the fly, but would also
improve the supply chain by offering early movie distribution if available. Currently
Redbox cannot stock its boxes with movies until the date on the hard copy graphic
insert. The implication here is that Redbox could look for time efficient and cost
saving methods to promote the movies already in its distribution channel.
Some of Redbox’s technology opportunities include hardware upgrades to
reduce waiting time in line. Customers returning DVDs spend time in front of
Redbox units figuring out the correct orientation to insert the DVDs in the return
slot. The DVDs must be inserted in a certain direction because there is only one
camera mounted internally to scan the barcode on returns. Redbox is testing multiple
hardware setups involving two cameras mounted inside the units, and moving the
146 Journal of the Academy of Business Education
return and vend slots to separate locations on the box. Customer confusion and the
time needed to return a DVD will decrease when a DVD can be inserted in any
direction.
From a software standpoint, Redbox is currently testing having customers return
and rent DVDs at the same time. This would involve keeping the same touch screen
size, but splitting the screen on the interface to allow concurrent customer
transactions. There is also a test application, which would allow the Redbox unit to
find a requested DVD faster as soon as the credit card is swiped.
Challenges for Future Growth
Redbox’s growth may slow as customer expectations and possible competition
increase. For example, customers may see greater value in the selection and movie
recommendation service offered by Netflix. The Video On Demand feature by many
cable providers such as ComCast is attractive to customers who want instant, in-
home access to movie entertainment. In fact, some analysts forecast that video kiosk
vending will peak in 2011 as more consumers opt for Video On Demand service
[Gruenwedel, 2010]. Redbox has responded by looking for a partner to launch
digital distribution of its movie titles to compete with Netflix, whose customers now
stream more content than rent via postal distribution. Other partnerships to increase
kiosk rental include Orville Redenbacher popcorn with a free kiosk rental included
with each popcorn box purchase [Kane, 2010]. Blockbuster is ahead of Redbox with
a greater distribution and selection of video game rentals and premium Blu-ray
movie versions via NCRs Blockbuster Express. Redbox has been quick to respond
by adding Blu-ray DVD rentals to its kiosk line up in 2010 at a $1.50 per night
premium. Video game rentals for $2 per night are also available in select Redbox
units [Kane, 2010].
Customers express concern that although they may reserve a DVD already
available at a certain kiosk, there is no way for them to request that a DVD be
delivered to a particular Redbox unit. DVDs must also be inserted into the unit in
a certain direction for the kiosk to register the return. This causes delays or customer
line-ups because customers cannot return and process a DVD rental transaction at
the same time.
CLASS DISCUSSION QUESTIONS
1. Analyze the direct marketing strategies utilized by Redbox and its main
competitors Netflix and Blockbuster Express.
2. How could Redbox improve customer interactivity to challenge competitors
who use behavioral targeting to provide video rental recommendations?
3. How could Redbox assess whether the hardware and software enhancements
designed to improve its direct marketing efforts by reducing customer transaction
and wait time be worth the financial investment?
4. What competitive advantage would Redbox gain by enhancing distribution
through offering movie transferability (i.e., customer can request a DVD to be
Fall 2012 147
transferred to a particular Redbox unit)? Would this potential gain in customer
convenience be worth the added cost?
5. How aggressively should Redbox pursue offering Video On Demand to
expand its market share?
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148 Journal of the Academy of Business Education
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Fall 2012 149
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