Coinstar, Inc.

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Coinstar, Inc.

1800 114th Avenue S.E.
Bellevue, Washington 98004
U.S.A.
Telephone: (425) 943-8000
Toll Free: (800) 928-CASH
Fax: (425) 637-8030
Web site: http://www.coinstar.com

Public Company
Incorporated: 1990
Employees: 552
Sales: $103.1 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: CSTR
NAIC: 81299 Miscellaneous Personal Services, Not Elsewhere Classified; 33313 Calculating Machines Except Computers

Coinstar, Inc., operates a network of automated, self-service coin counting and processing machines that provide customers with a means of converting loose change into cash. The Coinstar units, located in supermarkets, financial institutions, and mass merchants in the United States, Canada, and England, count loose coins and issue vouchers listing the total number, denominations, and dollar value of the coins processed minus an 8.9 percent processing charge. Coinstar also receives handling fees, which amount to about half its revenue, from consumer giants, such as Pepsi, Kraft, and General Foods, whose coupons Coinstar passes along to consumers on printouts. Coinstar is found in more than 8,900 U.S. supermarkets, and the company has turned more than $3.8 billion worth of coins into cash.

1991: The Start of a Unique Service

Jens Molbak came up with the idea for Coinstar in 1988, while he was a graduate student in business at Stanford University. One night, so the story goes, while sitting in his dorm room, thinking about the jar of coins on his dresser, he hit upon the idea to find a way to turn a service into a business. The penny held special significance for Molbak, who, as a ten-year-old, washed 28,011 flowerpots at his Danish immigrant parents’ plant nursery in Washington. The $280.11 he collected taught him, so he said in U.S. News & World Report, ”that there was real money in coins.”

Molbak’s idea was to provide a service to coin hoarders so that for a small fee they would be able to trade their coins in for more useable cash. In 1989, Molbak turned his idea into part of a graduate school project and stood outside Bay Area grocery stores with a clipboard interviewing people as to what they did with their change at the end of the day. “We talked to 1,500 people, and it turned out that three out of four had coins at home, with an average of about $30 [sitting unused] at any one time,” Molbak said in a 1997 Forbes article. As a result of his research, Molbak estimated that there was about $8 billion worth of change sitting around in jars in the United States. He arrived at this number by subtracting the estimated value of the coins in circulation from the value of all U.S. coins produced during the past 25 years. The remainder, $8 billion, equals a bit more than $30 per adult.

It took Molbak a few years to raise the capital for his private company and to perfect the green and yellow Coinstar machine, which combined ATM-style computer software and Las Vegas slot machine technology. Adapted from the electronic coin counter made by a Swedish company named Scan Coin, it cost about $12,000 and contained a computer, a modem, a video screen, and a printer; its sorting equipment was sensitive enough to kick out key chains, foreign coins, and lint while counting 600 coins per minute. An online network allowed all sorts of information to be transmitted, including how many slugs had been inserted, how much each machine took in by the minute and in what denominations, whether it needed servicing, and when the machine’s coffers were full. By the time the machine design was complete, the company held five patents on it.

In 1991, degree in hand, Molbak founded Coinstar. By 1992, Coinstar’s machines were installed in four San Francisco supermarkets, each of which received a small portion of Coinstar’s fees for promoting the service. In addition, stores benefited from the fact that Coinstar users had to go to a cash register with their machine voucher to collect their money; company surveys showed that three out of four spent part of their voucher in the store. Three years later, in 1995, Coinstar had placed 263 machines in stores. In 1996, the company had about 900 units in use in 18 states, with its largest concentration in Los Angeles; there, 347 machines took in about $5,000 per week and dispensed $4,625 in vouchers—more volume than all the rest combined.

The Late 1990s: Growth through Hard Times

The company began a national rollout of its machines in the late 1990s. Flush with $63 million in loans, which it secured in the fall of 1996, Coinstar had a total of 2,000 machines in 23 states by spring 1997. By year’s end, it had increased its presence to about 3,000 machines, in supermarkets and in two new markets—financial institutions and Target stores—nationwide. The company also began its “Coins that Count” campaign, offering customers the chance to donate their change to local non-profits through Coinstar machines.

However, the company had yet to turn a profit, and its annual financial losses had grown since 1991 due to the expense of expanding its business, attributable in turn to the cost of its machines. Between 1995 and 1998, the company lost about $52 million in the United States. In the summer of 1997, Coinstar went public, hoping to net more than $60 million in the deal, but had to settle for $29.3 million, selling one-third fewer shares for $10.50 instead of the originally hoped-for $15. A secondary offering of four million shares took place in July 1999.

The company remained unprofitable despite dramatic increases in revenue mainly because of the high depreciation costs on new machines. In 1998, Coinstar recycled more coins than the U.S. Mint produced—15.84 billion versus 15.81 billion—and revenues doubled to nearly $47.7 million. Still, the company lost $24 million for the year. Although Coinstar’s price per share increased to about double its initial price by late 1999, analysts expressed concern about the company’s long-term viability when weak third-quarter results—the result of a nationwide shortage of coins—led to a drop in the company’s stock price by half—back to about $11.

In 1998, with about 4,900 machines in 37 states, Coinstar began to look overseas toward the potential market in euros. By mid-year, the company had formed a new wholly-owned subsidiary call Coinstar International Inc. in an effort to expand its overseas operations in anticipation of the approximately $23 billion worth of various European currencies needing conversion into the common currency during the next several years. It also raised the transaction fee for its money-changing service to 8.9 percent, turning over 1 percent to supermarkets. In early 1999, the company placed three machines in Toronto stores and signed two separate agreements with British supermarket chains in the United Kingdom. In 2001, the company continued its push into Britain, signing up two more chains.

Turn of the Century: Turning Its Machines Into Marketing Tools

Coinstar also attempted to add to its revenue streams with a turn-of-the-century introduction of its Web site and in-store kiosks. This new service allowed customers to log onto www.my-meals.com and gain access to a recipe center and their grocery list. At the store, they used the kiosk to print out their list and receive grocery coupons. Supermarkets, for their part, could track consumers’ shopping patterns.

Finally, in early 2000, Coinstar felt confident it had hit upon a recipe for success. Sales had jumped from $77.7 million in 1999 to $103 million in 2000, while losses stayed fairly constant at somewhere between $21 million and $23 million. Coinstar converted Meals.com into a wholly-owned subsidiary and sold 11 percent of Meals.com’s shares to a consortium of investors—a virtual who’s who of Seattle’s tech scene—for $5.5 million. Daniel Gerrity took over as Coinstar’s chief executive, while Molbak assumed the positions of chair and chief executive of Meals.com. However, Gerrity resigned after only nine months in the top job in late 2000.

The company also began plans to make use of its network of machines to let consumers pick up tickets and other printed items ordered over the Internet, implementing a $10 million brand building television campaign using humor to exhort consumers to recycle their coins instead of, as before, the rational benefits of the service.

Coinstar’s “Coins That Count” program continued to thrive, providing non-profit organizations with the opportunity to use Coinstar machines to raise money. This philanthropic service offered consumers the choice of making a tax-deductible donation with their coins instead of receiving a voucher for the money they deposited in a Coinstar machine. The non-profit organization received 92.5 percent of the funds collected. In 1998, Coinstar entered into a national relationship with The U.S. Fund for UNICEF as the designated coin processor for their annual Trick or Treat for UNICEF program. During 2000, it initiated a relationship with the American Red Cross to help raise money for disaster relief.

Company Perspectives:

We are the first and only company to own and operate a national network of self-service coin processing machines. We believe that our key competitive advantages include our technology and expertise developed over the past seven years, the nationwide Coinstar network, our dedicated field service organization, our strong relationships with a majority of the leading supermarket chains in the United States and our proven ability to execute our rollout strategy. We compete on a regional basis with several direct competitors that operate self-service coin processing machines. We compete indirectly with manufacturers of machines and devices that enable consumers to count or sort coins themselves, and we also compete directly or indirectly with banks and similar depository institutions for coin conversion customers.

As losses from Meals.com led to increasing losses for the company as a whole, Coinstar continued looking for a way to make it into the black. The firm, which had more than 8,000 machines in 43 states, began working with partners Michigan National Bank and Data Wave in 2001 to issue MasterCard-branded plastic to use in its machines as pre-paid cards. Instead of receiving a voucher for coins, customers could opt to have the cash applied to the card, which could be used wherever MasterCards were accepted. A five-location trial of this service began with Coinstar machines in Seattle in mid-2001.

Finally, in May 2001, Coinstar announced its first profit of $11,000 for the first quarter from its more than 8,500 machines. The company’s net loss had been $24 million in 1998, $21.4 million in 1999, and $22.7 million in 2000. However, the company continued to lose money overall because of the losses of its Meals.com subsidiary. Around that time, Molbak announced his resignation as chair of Coinstar, planning to keep working at Meals.com. The company’s ailing Web site had lost $21 million since its inception. As a result, in June, the subsidiary laid off 31 employees, one-third of its work force, and attempted to buy back outstanding shares of Meals.com. The plan was to sell Meals.com in order to focus again on Coinstar’s core business.

Coinstar executives still considered the United Kingdom a promising growth area in 2001. Returns from its U.K.-based machines were higher overall than those for its American-based machines. In the United States, Coinstar planned to build its sales by adding high margin services to its grocery store kiosks—pre-paid phone cards and MasterCards. The company would derive profit from the interest charged on outstanding balances as well as a fee from bank issuers and telecommunications companies. The company also expected to cash in on the country’s economic downturn, reasoning that when people feel hard-pressed financially, they are more likely to take the time to turn in their loose change.

However, with a history of sustained operating losses since its inception and the expectation of continued losses, Coinstar itself acknowledged that it might not be able to install a sufficient number of machines or maintain existing levels of customer utilization to allow it to achieve profitability or generate sufficient cash flow to continue to meet its capital and operating expenses and debt service obligations.

Principal Subsidiaries

Coinstar International, Inc.; May Shoppinglist.com, Inc.; Coinstar Ltd. (U.K.); Meals.com, Inc.

Principal Competitors

CoinBank Automated Systems Inc.; Continental Coin Processors; LPS Money Systems Inc.

Key Dates:

1991:: Jens Molbak founds Coinstar.
1992:: Coinstar machines are installed in four supermarkets in San Francisco.
1997:: The company holds its initial public offering.
1998:: The company forms Coinstar International, Inc.
1999:: Coinstar forms Meals.com Inc.; the company’s secondary offering of four million shares takes place in July.
2000:: Coinstar converts Meals.com into a wholly-owned subsidiary; Daniel Gerrity replaces Molbak as Coinstar’s chief executive, and Molbak assumes the positions of chair and chief executive of Meals.com.
2001:: Molbak steps down as chairman of the company.