How Red Box Is Changing Retail

November 15, 2009

BY MICHAEL KRAUSS

Walking into my grocery store in suburban Chicago, I noticed a new red kiosk to the left of the front door. The large vending machine is from Redbox, and each time I go shopping—morning, noon or night—I see people renting from the kiosk.

If you’re not familiar with Redbox, here’s how it works. It offers new movie releases on DVD every Tuesday. You rent DVDs for a $1 per day with no late fees. It accepts all major credit cards. Each kiosk is equipped with a cellular, DSL or cable modem connection to authorize transactions, monitor sales and inventory, and update graphics on the kiosk display. Customers return the DVDs to any Redbox kiosk location.

Last year Redbox rented more than 200 million DVDs to 50 million shoppers through 17,000 kiosks in front of 300 different retail chains from Walgreens to Walmart to Kroger. That’s 17,000 self-serve kiosks for Redbox versus approximately 5,000 staffed locations for its nearest bricks-and-mortar competitor, Blockbuster Inc. Redbox Automated Retail, which was founded by McDonald’s in 2002 and spun out to become a wholly owned subsidiary of Bellevue, Wash.-based Coinstar Inc. in 2009, estimates revenues of $750 to $780 million this year—earned $1 at a time.

Consumers love Redbox. They boast one of the highest imaginable Net Promoter Scores at 85%. That means when a cross section of customers were asked, “On a 10-point scale, where 1 is not at all likely and 10 is extremely likely, how likely is it that you would recommend Redbox to a friend or colleague?” the percentage of promoters (rating 9 or 10) less the percentage of detractors (rating 1 to 6) was an amazing 85%.

“Redbox is great on so many different levels. It's a great value to consumers. And it's a great value to our retail partners, because we drive traffic to their stores and we also provide them a revenue share,” says Gary Cohen, senior vice president of marketing and customer experience at Redbox.

“There's a lot of technology behind Redbox,” Cohen adds. “We want it to be simple for the consumer. Here's the movie you want. Go ahead and take it home right now.”

Cohen says Redbox outperforms Blockbuster and doesn’t compete directly with online/snail-mail DVD provider Netflix.

“We fulfill a really interesting need. We provide a strong, immediate gratification. That's hard to beat. We're significantly less costly than Blockbuster. We provide a lot more immediacy than Netflix,” Cohen adds.

Redbox isn’t ignoring the Internet. The company has a loyal customer following of 12 million users who hear from them online each week. And you can be sure that Cohen, a serial Internet entrepreneur, understands that digital media can be downloaded on demand over telecommunications, cable TV and satellite networks. Yet Redbox prospers.

Listening to Cohen you realize that Redbox may be the answer to businesses threatened by innovative online competitors. It isn’t necessarily technology that creates winners. Simple, powerful business models that yield value to customers will succeed, whether they are online or off.

And Cohen, with his eclectic, entrepreneurial background may be more the model for tomorrow’s CMO than the traditional Proctor & Gamble product manager.

Cohen received his bachelor’s degree from Union College in Schenectady, N.Y., and earned an M.B.A. from the University of Chicago. After graduation he worked developing channel strategies at management consultancy Frank Lynn & Associates. Then he joined Zenith Data Systems where he helped spin out mobile wireless technology provider Cruise Technologies, a pioneer developer of hardware for connecting wireless devices to personal computers.

“After the sale of Cruise’s assets, my co-founders and I were asking ourselves, what’s going to be big?” Cohen says. That led to the creation of MusicNow, a pioneer in the digital music distribution business long before iTunes. Cohen led the company’s music partnership and distribution deals and eventually helped sell MusicNow to Circuit City and then to AOL. At AOL he helped drive the digital media services organization. Prior to joining Redbox, Cohen was managing director of Chicago-based Six Degrees Capital Management, an investment firm that focuses on media, technology and intellectual property investments.

“Redbox is six years old. We are an entrepreneurial company, moving quickly, trying to make the best decisions we can. That's what a good entrepreneur does,” Cohen adds.

“There are lots of different ways you can ascend the marketing ladder. I have always tried to find a product I believe in and understand what other people think about the product--the good, the bad and the ugly. Then find the uniqueness and drive that message home,” Cohen says.

That’s just what he’s doing with Redbox.

Michael Krauss is president of Market Strategy Group, based in Chicago, and can be reached at Michael.Krauss@Mkt-strat.com or news@ama.org.