Redbox hopes lack of competition in DVD rental biz will make kiosks a success

TORONTO – When major video stores Blockbuster and Rogers Video began to close their doors last year, some movie enthusiasts hoped it would usher in a new era of digital possibilities for the Canadian rental market.

Instead, they’ve been left waiting as a handful of new entrants like Netflix and iTunes saunter into the billion-dollar industry with a sometimes limited selection of new releases, and a back catalogue that left some longing for the dusty video stores of yesteryear.

Redbox is a latecomer to Canada, but the Illinois-based company hopes its kiosk business model will energize the industry as it rolls out its DVD-rentals in retail outlets over the next year.

If its success south of the border is any indication, Redbox could be become a competitor to contend with, mostly because its low-priced DVD rental model of $1.50 per-day is practically unheard of in Canada.

But, the company will be battling against sentiment that physical discs are a dying format and late fees are a hassle.

Redbox has secured agreements to set up kiosks at Canadian Walmart retail stores and convenience stores operated by Alimentation Couche-Tard Inc. (TSX:ATD.B), which places it amid impulse buyers picking up groceries and other regular essentials.

“We looked at Canada and (recognized that) it’s the third largest country in the world for DVD rentals,” said Ron Cihocki, head of its Canadian operations in an interview.

“You get to be a pioneer, quite frankly, and have some fun with a brand that’s very strong in the United States.”

While Redbox says it’s a pioneer, the company is also treading into kiosk turf that several others have been navigating on a smaller scale.

Over the past year, DVD kiosks have sprung up across the country from companies like Best Buy, Playdium, and Planet DVD, each one planting its flag in particular urban or suburban markets, and offering a similar price structure ranging from $1 to $2 per rental.

The Redbox debut will be more aggressive than its counterparts. A nationwide rollout which started last month in Toronto and Vancouver will grow to as many as 2,500 kiosks by the end of 2013, putting it in line to be the biggest rental outfit in Canada.

Founded a decade ago, the company originally built its name south of the border renting DVDs for $1 per day. Though its prices have since increased slightly, to a little over a dollar a movie, it still remains one of the most popular entertainment options in the U.S., having just surpassed 2 billion rentals at its 30,000 kiosks.

However, the selection in a Redbox kiosk pales in comparison to a typical video store. Each machine can hold about 200 titles. Most of them are new releases, and while some of those titles aren’t available online, conversely other major Hollywood films don’t show up at Redbox for weeks, due to a release window enforced by distributors.

Redbox also faces an uphill battle as sales of physical discs have been falling for years, a trend which suggests more consumers have become accustomed to digital downloads and on demand services.

When Blockbuster exited the Canadian market last year it insisted the DVD business was still profitable but that its new U.S. owner needed to liquidate certain assets to pay off overhanging debts.

Rogers told a different story when it began to close some stores in 2011, saying that its video business had been on the decline since 2005. Last October, the company’s earnings showed that video revenues dropped 46 per cent from the comparable period of 2010 — falling to $60 million.

“To me, it’s a declining business,” said Wendy Evans, head of retail consultancy Evans and Co. Consultants Inc. said of DVD rentals.

“But just because demand hasn’t been enough to sustain the larger space operators, it doesn’t mean that smaller, low-cost kiosks … wouldn’t be a viable option.”

The pros and cons of a physical video store have been contemplated by Cihocki over the years. Before taking the role at Redbox he served as general manager for national retail at Rogers Communications (TSX:RCI.B) around the same time that the telecommunications giant was weighing its exit from the rental industry.

“Certainly with my background, I’ve been involved with some of the decisions that were taken there,” he said.

“While others may have seen it as not fitting the business model they had — with bricks and mortar comes inherent costs — it is a huge opportunity for us.”

Whether Canadians are as enthusiastic about Redbox remains to be seen, though a study commissioned by the company shows thirst for movie rentals hasn’t waned, even if the options have.

Nearly half of Canadians rented a movie from a video store in the last half of 2011, while more than a quarter of Canadians were binge movie watchers, renting six to 10 movies over the last three months of the year in stores or online, the Redbox study found.

Since the survey was completed in January, many Canadian neighbourhoods have lost most of their local video stores, so it can be assumed those DVD rental numbers have since plummeted.

The question now is whether Redbox will be able to recapture the passion for video stores by putting them in a box.