How Coinstar makes money offering no fee gift cards, & my experience

June 7, 2016

Yesterday, I used a coinstar machine for the first time.

Topics
1. Running efficent errands
2. My Coinstar Experience
3. Coinstar History
4. How coinstar makes money
5. Bottom line

Scroll down according to your reading time preference.

1. Running Efficient Errands:
I timed my errands so perfectly that nothing was out of the way.

Used the law of least effort. Did not have to backtrack nor did I forget to do anything. I think this is happening because I’ve been listening to a lot of methodical folks like Elon Musk, Jeff Bezos, and Warren Buffett. As a right brain person, this type of efficiency is new to me.

First I dropped off a package at the UPS store right down the street. I also printed a mailing label there, queued up the night before, so that it would be ready now. Only 12 cents. I don’t have to own a printer or mess around with ink. Awesome.

Then to the haircut place, off a left turn from there, no traffic light.
The same cheerful Ukrainian Pisces woman (though she “doesn’t believe in any of that”) has been cutting my hair for about 11 years now. I see her about 6 to 7 times a year and chat about life and share funny stories.

And after that, to a grocery store in the same lot. I wanted to pick up some dates and gluten free bread. And the main reason being that this store also has a coinstar machine. The only one within a mile or two of here.

There’s a small jar of coins I’ve had for years. It keeps moving with me to new apartments, yet never gets used. And my car also holds a bunch of coins, for who knows how long now. Time to get some spendable cash out of that.

2. My Coinstar Experience
The machine took a couple moments to figure out.

Even though it’s all touchscreen and automated, you can tell that the system is second or third tier when it comes to technology. Nothing too bad, but it was noticeable enough for my conscious mind to have to pay attention and expend a few extra ounces of mental energy.

It’s not as fast in responding as an iPhone, and the onscreen keyboard kept picking the wrong letters when I typed in my email address. I thought they would email me the gift card but instead it’s to join their newsletter I think.

It asks:
Cash or gift card?
Are you depositing paper cash or coins?
You click what you want.

Then it tells you to dump the coins into the metal basket type thing with holes in it. The holes kinda resemble coins, so at first I thought you had to push the coins down those holes. Tedious. But they wouldn’t go thru.

Then I looked at the screen again, no real instructions. Most people probably don’t need instructions but I was having some trouble here.

I later figured it out. Spread out the coins onto that metal hole basket, then lift it up with the handle on the left, so that coins slide into the right side of the machine. I don’t know why the holes are there but they probably serve a purpose.

So about reimbursement, I knew beforehand that if you want cash back, they will charge a fee of 10.99%. I’d have gone to my bank instead but they don’t accept coins, I heard.

The Coinstar machine doesn’t dispense actual cash for your coins, but gives you a printed receipt you take to the grocery store customer service and they’ll reimburse you.

Gift cards are free.
These are also printed receipts, not plastic cards nor can you get it emailed to you (which I’d prefer).

The only one I want is Amazon, since that’s almost as good as cash. But there’s also starbucks, itunes, and a few others I didn’t look at.

I got around $27 worth. A lot more than I thought I had. Cool.

3. Coinstar History:
Coinstar, along with Redbox, is owned by Outerwall Inc.
A 747M market cap company with $2.2B in revenue. Pretty big.

As a completely unrelated comparison, WWE has $1.37B market cap with $659M annual revenue. A person off the street with no interest in investing would likely expect the reverse, with WWE having $2.2B revenue and $659M for Outerwall.

Outerwall also has other machines that recycle old technology for cash back. You can even buy slightly older technology, like used Samsung phones, from some of their other machines. Redbox and Coinstar are their big moneymakers.

They basically make money handling declining outdated technology, whether it be phones, tablets, dvds, blue rays, or metal coins. A kind of automated recycler.

Their name Outerwall stands for the idea that they are pushing retail walls even further outside, as Coinstar machines are found at the end wall after paying for groceries. Usually there’s nothing for sale here by the grocery store and served as empty wasted retail space. Nowadays there are machines owned by Outerwall and various lottery machines occupying the area.

Redbox machines can also be found outside physical stores, like Walgreens. Thus transforming the outside-facing wall into a retail space.

These red dvd & video game dispensers were originally a joint venture with McDonald’s. Coinstar wanted to work with high traffic retailers to test out their dvd machines, and McDonald’s, a 47% investor, turned out to be their partner in 2002.

In 2009, they bought out the golden arches to become the sole owner. And in 2013, they changed their name from Coinstar to Outerwall.

4. How does Coinstar make money?
When I got the option of getting a gift card for all my coins, without a fee, I wanted to know how that’s possible. I gave them $27 worth of coins. They gave me $27 worth of amazon gift card. Where’s the difference?

Coinstar is a for profit company and needs to make money.
The machines likely put all those coins automatically into paper sleeves. Or maybe they do that at one of their main facilities. One of their techs has to manually come and take money out weekly or monthly. And perform maintenance as needed. Maybe the same guy takes the money to their bank. The grocery store must get a percent cut or a flat rental fee for allowing the machine on their property.

So what’s the deal?

I’m happy to say I figured this out mostly by myself, at the cost of burning some glucose in the good ol’ noggin.

If Coinstar is charging a 10.99% fee to transfer coins into cash, they must make at least that from selling gift cards. Likely much more.

Gift cards are great for retailers because it’s someone prepaying to buy their products. When your Aunt Agatha gives you a $100 gift card to Macy’s (instead of somewhere useful like Amazon), all you get is a piece of plastic I.O.U, while Macy’s got a crisp new benjamin in their bank account. Money is money and getting it upfront before providing any service is the best.

Next, there’s a chance we won’t use the gift card at all. I read that 8-10% of all gift cards don’t get used. Another site says that number is as high as 33%, though that seems too high.

You may either forget or lose the card.
Next, it may be too much of a hassle to drive to the store to use it. Or you don’t really want anything from that store to begin with. Or some stores may still be charging a shipping fee for online purchases. Many reasons.

Assuming 10% leakage, if a retailer gets $100 worth of cash for giving us a gift card, they’re only giving us $90 worth of product on average. That’s already 10% they can pay Coinstar for their service.

So when Coinstar gave me a paper receipt, instead of giving me the option to email the gift card, I immediately got worried I’d lose that slip. What if when I get home, Amazon doesn’t recognize this thing? Irrational, I know but still, things like that could happen.

First thing I did when I got home was to load that gift card number into my account. In hindsight, I could’ve taken a picture of the receipt with my phone as a backup or entered the gift card into my account on the spot. But for $27, it wasn’t worth that effort.

Back in the day, retailers used additional tricks like expiration dates and fees for their gift cards. Nowadays, with competition and more transparency amongst consumers, that is no longer the case.

Amazon gift cards don’t have any fees nor expiration. They do have a minimum purchase amount of $49, for all nonprime customers, before getting free shipping. The average Coinstar transaction is $38, according to Wikipedia. This is a nonissue for anyone with access to prime free shipping, which they allow up to four friends and family to share per account, estimated to reach 48% of all US households.

Next, Amazon and other retailers know that there’s a cost to getting customers. Marketing and advertising. I don’t know what that number is for Amazon but I used to work in the marketing department of a large online furniture retailer. Their average cost for a new customer was around $50, so you can now understand why they regularly offered a $50 coupon on their site if you signed up.

And each customer is worth something to these retailers, there’s a lifetime value to every new customer. If a new customer costs $50, and they keep that customer happy, it could mean lifetime value of $1000s of dollars.

So it benefits Amazon, (and Walmart, Apple, Home Depot, Lowe’s, Starbuck’s) to be available anywhere people are willing to spend cash on gift cards.

5. Bottom Line:
Out of the $27 in gift card cash I got for my unused coins, I assume Amazon paid 20%-30% fees, or $5.40-$8.10, to Coinstar.

And when I buy something, likely a 5 pound tub of whey protein for $57, Amazon makes that back and much much more.

Outerwall probably pays a flat rate to the grocery store, maybe $100 per month plus electric and internet fees. The store gets free money for unused retail space.

It’s a win-win-win-win for all parties.

Real accurate numbers are probably out there in the googleverse, but this is as far as my grey matter, with the help of sugar and caffeine, got to figuring out.

I don’t understand why big banks don’t do this themselves and take a dent out of Outerwall’s $2.2B revenue. Just build those kiosks right into the atm machines. Maybe this amount of money is small potatoes for the big banks to mess with.

(Ok, I looked it up. JP Morgan Chase already has a massive $97B annual revenue, 240B market cap).

Resources:
Outerwall Inc – Wikipedia
Amazon Prime now reaches nearly half of U.S. households