Analyst: Redbox Growth Facing 'Increased Headwinds'

18 Jun, 2014 By: Chris Tribbey

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Redbox, holding a majority share of the physical disc rental market, has little in the way of competition nowadays. But with consumers’ increasing reliance on digital and with Redbox running out of new places to put its kiosks, there’s little room for the company to grow, according to Eric Wold, analyst with B. Riley & Co. in Los Angeles.

“While our belief in the near-term stability of physical rental demand remains intact, with competitive pressures diminished or eliminated, Redbox will be increasingly impacted by industry changes and shifts in consumer behavior,” Wold wrote in a note to investors. “With that in mind, we project it might actually prove difficult for Redbox to grow revenues in the low-single digits (at best) as the company has moved away from promotional activity to drive traffic/margins.”

Redbox earlier this year announced it was removing approximately 500 kiosks nationwide, an admission that the company had hit a saturation point in the United States. A price increase — from $1.20 per day for DVD, $1.50 for Blu-ray Disc — may be the company’s best bet for increasing margins, Wold said, but any benefit would be short-lived (Redbox raised first raised its rental prices in late 2011).

“While the previous Redbox price hike drove higher revenues per kiosk, the boost ended up being lower than the 20% increase and revenues per kiosk soon turned negative,” Wold wrote. “Although we believe Redbox will test higher prices this year, we are less confident about the net benefit and ultimate decision to go through with an increase given potential impacts to basket size, holding period and/or necessary promotional support.”

And Redbox has also shared that Redbox Instant, the hybrid disc-streaming service the company co-owns with Verizon, won’t turn a profit this year, despite Redbox parent company Outerwall investing $63 million in the venture.

“We see fewer near-term and visible opportunities to boost growth trends outside of the current core operations,” Wold said of Outerwall.

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