Coinstar looks at clutter and sees profit potential

In most grocery stores, the front area between the cash register and the door is an afterthought -- an eddy cluttered with shopping carts, vending machines, cases of cigarettes and 50-pound bags of dog food and charcoal.

But Coinstar Inc., the Bellevue provider of those ubiquitous green coin-counting machines, has a plan to revamp that space, complete with its own trademarked term: the Fourth Wall.


		Grant M. Haller / P-I
	While other parts of grocery store are carefully arranged to capture as many dollars as possible, the front end has received little attention or planning from most retailers, as in this QFC on Capitol Hill. Coinstar sees revenue opportunities on this "fourth wall."

Most shoppers decide where to buy their groceries based on the produce and meat sections of a store (industry folk call it "perimeter of the store"), picking up cereal and other boxed goods in the center aisles.

The use of every inch of those shelves is calculated with precision.

For example, ever notice that the most expensive brand-name products are placed at eye level?

Or take milk and eggs. As household staples, they are often placed along the store's back wall -- forcing shoppers to walk through tempting aisles of processed goods to get them.

But the front part of the perimeter -- Coinstar's Fourth Wall -- has functioned like an attic for the odds and ends that didn't make it into other parts of the store.

"It is kind of a dump area, used for seasonal merchandise, fireplace logs, furniture, lottery machines ...," said Bob Goldin, executive vice president of Technomic, a Chicago-based food market research firm. "Every square foot in a retail store is valuable, but the front area is less well-tended and managed than others."

That is what Dave Cole, the chief executive of Coinstar, noticed shortly after taking his position in October 2001 with a mandate from the board to diversify the company.

"The first thing that the retailers wanted was more sophisticated and professional suppliers, because it had mostly been local and regional mom and pop suppliers," Cole said, speaking of vending manufacturers and operators.

Although it comes in a quarter at a time, vending machines in the United States collected $44 billion in 2004, according to a 2005 industry survey by the Vending Times.

So, Coinstar bought American Coin Merchandising Inc. last year for $235 million, acquiring 18,000 locations of candy, toy and video-game machines -- and access to Wal-Mart, a client that accounted for almost half of American Coin's revenue.

With Tuesday's announcement of a $36 million-in-shares purchase of Amusement Factory LLC, another entertainment vending company, Coinstar hopes to consolidate its grip on the front of the store.

"Our goal is to be that category's captain," Cole said. "The retailer's goal is to maximize profit in that space, and there is an opportunity to dominate the 'owned-and-operated' space in the store."

Coinstar's current offerings overlap in just 3,000 spots with Amusement Factory's 14,000 placements of skill crane and bulk vending machines and kiddie rides, spread throughout Wal-Mart, The Kroger Co. (the owner of Fred Meyer and QFC), Safeway and Albertsons stores, as well as dollar stores and restaurants.

"The acquisition of Amusement Factory is a no-brainer, given their previous acquisition of American Coin," said Robert Evans, a senior analyst and managing partner with Craig-Hallum Capital Group.

"One of the reasons they bought the company was to get its retail distribution -- which they could have tried to do by getting those contracts as they came up, but this was far faster and probably more cost-effective."

Still, getting into the entertainment business -- while increasing Coinstar's reach -- has also been a drag on the company's profits, according to analyst Alan Robinson of Seattle-based investment bank Delafield Hambrecht, which is a market maker for Coinstar.

"The problem with Coinstar generally is that the entertainment business has proven to be somewhat of a ball and chain," Robinson said, noting that the gross margins from the company's entertainment vending machines are much lower than those of the coin-counting business.

But, he said, "moving into category management and consulting the supermarkets about their front ends makes sense -- Coinstar's knowledge is not an asset that appears on their balance sheet, but it is a strength that they can use."

In the process, Coinstar hopes to revamp its own business, transforming itself from being purely a machine operator into a supermarket category manager and consultant.

In the coming months, Coinstar will be tinkering with the placement of the machines, free magazine racks and services such as the Rug Doctor that many shoppers just stride by, pushing their carts. And it just so happens that Coinstar has quite a few machines of its own to arrange there.

Everything about the front space will come under scrutiny, such as how many people end up buying from the vending machine because their jumpy kid pulled them to it while the parent fiddled with the ATM.

Coinstar's "learning labs," beginning soon in a few national and regional chain supermarkets, could transform the front end of the store well enough to eke out a few more dollars from shoppers. They will have the results by spring, according to Ted Taft, a partner in Meridian Consulting Group, a Westport, Conn.-based firm that is helping Coinstar with its Fourth Wall initiative.

Taft wrote a report based on studies for a trade association, the General Merchandise Distributors Council Educational Foundation, that suggested that most retailers think that finding new ways to make money in their existing stores is the key to their future health.

That's in contrast to the past strategies of consolidation and cost cutting, which ended up with an industry dominated by huge chains such as Kroger and Wal-Mart.

Albertsons tried to keep up with its competition's size, and bargaining power, by buying American Stores Co. and Shaw's Supermarkets.

It didn't work -- just last month, the company said it was putting itself up for sale.

"Albertsons is the poster child for the old model -- the entire energy of management has been focused on merging those disparate systems and cultures," Taft said.

"Well, they became a plain-vanilla grocery store, and all of the sudden, Albertsons said, 'Wow, we're stuck in the middle.' "

The vise in which Albertsons finds itself consists of two jaws: Wal-Mart staking out the deal seekers with aggressive pricing and high-end retailers such as Whole Foods Markets catering to the conscientious and cost-oblivious shopper.

And shoppers themselves are going to more outlets per week, defying the retailers' full-court-press to make each store a one-stop experience.

Taft said that in order to make the front end a destination rather than a postscript, Coinstar will experiment with things such as automated DVD rentals: "It's the whole idea of channel blurring, where everyone is competing with everyone."

What is clear is that Coinstar is making its move to catch shoppers coming and going. In doing so, it may find a small way out of the grocery industry's dilemma.

P-I reporter Kristen Millares Bolt can be reached at 206-448-8142 or kristenbolt@seattlepi.com.

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