Making the Most From Loose Change

  Grocery shoppers in recent years have become accustomed to seeing and hearing coin-counting machines chugging away at the front of the store. But they might not know that Coinstar Inc., the largest owner of these counters, is not content with the easy money that comes from charging customers an 8.9% fee to change their coins into store vouchers or cash.
  Since 2003, the Bellevue, Wash.-based company has used all those dimes, nickels and pennies to build a suite of e-payment products and to break into Internet commerce. The company also hopes to become a leading player in the prepaid debit card market.
  For the first 12 years after Coinstar was founded in 1991, the company looked low-tech and concentrated on increasing the number of its now ubiquitous big green mechanical counting machines. Starting with four counters placed in a set of San Francisco Bay Area stores, the company now has some 12,000 kiosks installed across the country.
  Coinstar's dominance in coin counting is no accident. From the beginning, its counters' low-tech look masked a high-tech capability. Each kiosk is connected to a communications network linked to Coinstar's headquarters near Seattle, allowing the company to track how much money each machine contains, and when it needs repairs.
  Coin-changing was a mom-and-pop operation across the country, but Coinstar's network allowed the company to build a national field service organization. "If you're a big chain, with two or three-thousand stores, you'll want to deal with a national player yourself," says Steve Verleye, head of the company's e-payment division.
  Coinstar has reconfigured thousands of its kiosks so consumers can use them to buy and add value to a Green Dot Prepaid MasterCard, issued by Columbus Bank & Trust, or to receive prepaid vouchers for Internet retailers.
  The new corporate strategy centered around prepaid also has sent the company on a buying spree.
  Among the company's recent acquisitions include CellCards of Illinois LLC, which uses point-of-sale terminals in checkout lanes to activate and reload prepaid phone cards, and American Coin Merchandising Inc., which owns more than 160,000 coin-operated kiddie rides and amusement games in retail outlets such as Wal-Mart Stores Inc.
  Verleye says Coinstar has upgraded more than 4,000 of its machines in the past couple of years. Now the machines can turn coins into a prepaid debit card supplied by Coinstar's growing list of retail partners, which include Starbucks coffee shops, Borders book stores, Hollywood Video and Linens 'n Things.
  Better yet, the consumer pays no fee when opting for the card. The retailer pays Coinstar a piece of the deal instead.
  "What's really cool about this program is it's another way for Starbucks enthusiasts to get a gift card and to get it with loose change," says a Starbucks spokesperson.
  The product expansion makes Coinstar an umbrella organization containing several parts: coin counting, prepaid cards and vending-machine games. What ties the disparate companies together is their products' placement in the front end of the nation's supermarkets, drug stores and truck stops.
  "Their primary strategy is to work with [merchants] to get a better return on what they call the Fourth Wall," or the front of the store, says Tom Miezejeski, vice president of research at The Pelorus Group, a New Jersey-based market-research firm that studies prepaid products. Prepaid is the main tool Coinstar plans to use to collect an increasing share of the approximately $10 billion in spare change Americans have lying around the house on any given day.
  Prepaid wireless cards were starting to take off, says Verleye, and Coinstar saw a need for a whole range of financial-services products, such as prepaid cards, for low-income or otherwise "unbanked" consumers. "We thought, 'Let's put these cards and services on our kiosks,'" he says.
  Coinstar retains its 8.9% coin-changing fee, but an internal study found it put off nearly a quarter of all consumers. "We found they'd rather have the coins sit in a jar than pay 9%," Verleye says.
  Coinstar has taken a punch or two since unveiling its strategic moves beyond coin counting. In 2003, Safeway Inc., a chain of more than 1,000 grocery stores that provided Coinstar approximately 10% of its revenue, decided it wanted an in-house coin-counting operation and dumped Coinstar machines.
  "The stock came down almost 30 percent in one day," says Alan Robinson, a financial analyst who follows Coinstar for Seattle-based Delafield Hambrecht Inc.
  Coinstar officials and analysts agree that the promise of e-payment through prepaid cards has not yet been fulfilled. "It's not profitable yet because it's a nascent industry," says Robinson.
  Revenue Up
  Even with the communications network in place, Coinstar has to spend a lot on capital expenditures, Robinson adds. Even so, second-quarter revenues from the coin-counting and e-payment transactions increased 14.6%, to $54.8 million from $47.8 million during the same period in 2004
  The $235 million loan Coinstar took out in 2004 to buy the vending operations of American Coin might have raised a few eyebrows, especially considering its flat performance. But investors do not seem fazed. "It wasn't much of a gamble," says Robinson, because the acquisition drove Coinstar's revenue from $176 million in 2003 to $307 million in 2004.
  In 2005, Coinstar combined American Coin's offerings with some existing operations and made it the company's entertainment division. "We're really in the early phase of that integration," Verleye says. But the potential is great, he adds.
  For a decade, Coinstar relied on its network of coin-counting machines. "But you're very vulnerable as a company if you are a one-trick pony," Verleye says. Coinstar responded with its acquisitions, expansion into new products and deals with merchants.
  And the cadre of retailers keeps growing. In September, customers could convert coins into prepaid funds to purchase books, music and other products online at Amazon.com.
  The deal might have wider implications. "It facilitates using cash on the Internet, and that hasn't always been easy," says an Amazon spokesperson. Many of the Coinstar machines now have bill acceptors so customers do not need to break open their piggy banks to shop on the Internet with cash, according to the spokesperson.
  Coinstar has found another means by which prepaid cards can provide added convenience to consumers and merchants. And the company has illustrated that, even with small change, prepaid cards are valuable tools.
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