‘O Kiosk’: Disc Rentals Spark Location Rush in Canada

15 Apr, 2013 By: Erik Gruenwedel

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Redbox rents 1 million discs in first 10 months of operation

When Redbox last year announced it would expand operations into Canada, conventional wisdom suggested the kiosk disc rental pioneer’s foray wouldn’t lead to a second Klondike gold rush anytime soon.

After all, with Netflix attracting 1.4 million subscribers after bowing SVOD service in 2010, and Blockbuster and Rogers Video ceasing operations in 2011 and 2012, respectively, Canadians appeared indifferent to packaged media. 

Guess again. Just 10 months after its first rental in Vancouver, Redbox recorded its 1 millionth Canadian disc rental on March 23. The tally is expected to grow significantly by the end of the year when the Coinstar subsidiary completes installing a planned 2,500 kiosks.

“We’re delighted that Canadians have chosen Redbox as their [rental] destination,” Ron Cihocki, country manager for Redbox Canada, said in a statement.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said Redbox Canada will eventually take over most high-traffic locations, including grocery stores, in the country and then look for better locations while closing underperforming ones.

“They’re pretty deliberate in their strategy,” Pachter said.

Indeed, Coinstar CEO Paul Davis, who retired March 31, said Canada is the third-best movie rental market in the world.

“It’s all about having presence and brand recognition,” Davis said in a recent fiscal call.

Redbox’s success has triggered third parties such as Best Buy and Zip.ca establishing their own network of disc rental services in Canada renting movies from $1 to $2 a night. 

Leading the charge is DVDNow, the kiosk supplier to Best Buy Canada and independent entrepreneurs, operating rental kiosks around the world. First launched in 2006, DVDNow has more than 3,000 kiosks operating independently in 16 countries, including Mexico, South Africa, Ireland, England, Guam, New Zealand, Australia, Costa Rica and the United States.

DVDNow franchises typically incur $23,000 in start-up costs depending on the number of kiosks and type of business operation, according to Entrepreneur.com.

Zip.ca, a fulfillment company that operates a by-mail subscription disc rental service, operates about 100 kiosks at Metro and Food Basics retail stores throughout the Ontario region of Canada.

DVDNow supplies Best Buy with about 200 kiosks — manufactured in the chain’s branded blue and yellow colors and design specifications — that are being placed in Mac’s Convenience stores, 7-Eleven and PriceSmart locations.

Since its licensees operate independently, they haven’t signed any studio embargo agreements, according to Scott McInnes, founder and CEO of DVDNow. That, he said, means they are able to offer Fox, Warner and Universal new releases, among others, up to 28 days earlier than Redbox since they aren’t bound by studio distribution contracts.

DVDNow acquires content through wholesalers (many of which are subject to studio embargoes), but, as Redbox has, also employs a workaround on embargoed titles by buying at retail. DVDNow kiosks also offer titles for sale.

“Redbox has actually been good for business because the challenge is the trepidation people have renting [and buying] movies from kiosks,” McInnes said. “When Redbox comes into an area, renting movies from kiosks becomes an everyday thing.”

An Independent Streak

Peterborough, Ontario, resident Janet Irven started her kiosk rental business, Express Cinema, in 2011, and now operates four kiosks at local retail businesses. To date, there is just one Redbox in her region at the local Walmart.

“Peterborough had almost nothing for a year when Blockbuster and Rogers shut down,” Irven said, adding that her competitive advantage is providing customer service at the local level.

“When people call and I pick up the phone, they are so impressed they get to speak to a live person,” she said.

Lethbridge, Alberta, resident Kirk Allison owns U Do It DVD Enterprises, operating kiosks at Lethbridge College, the University of Lethbridge, the Gas King convenience store in Southview, and another in nearby Coaldale at the Esso Stop N Go.

“We used to have the Movie Gallery, Blockbuster and Rogers. They’re all gone now,” said Allison, who started his kiosk business in 2009. “I saw how well Redbox was doing in the U.S. and thought there was an opportunity.”

Allison said he expects to add two more kiosks by the end of the year.

Tapping the Best Buy Brand

While Best Buy is scaling back packaged-media shelf space in stores and upping the profile of CinemaNow, its transactional video-on-demand and electronic sellthrough platform, kiosks add to the CE chain’s home entertainment options, including digital, rental and purchase, according to Martin Caines, director of merchandising for Best Buy Canada.

“The shift to digital was made quickly in the market, but not all customers were quite ready for that change,” Caines said. “More than 60% of Canadians purchased DVDs last year and with few remaining locations to rent or purchase physical movies, we saw an opportunity to bridge this gap.”

Just how long Best Buy operates kiosks in Canada is a matter of speculation, with the recent arrival of new CFO Sharon McCollam. Best Buy is in the midst of a reorganization, with new CEO Hubert Joly, former CEO Brad Anderson and founder Richard Schulze joining the board in an attempt to reverse the company’s recent struggles in a changing CE retail environment.

“I suspect with the new CFO that this [kiosk] business will be de-emphasized considerably,” R. Scott Tilghman, senior analyst with B. Riley & Co., wrote in an email. “I understand it is largely franchised with some very unhappy franchisees, and not [a business] Best Buy will give much attention to going forward.” 

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