Redbox: Unorthodox Procurement — Circumventing Hollywood to Cut Costs

I love new business models built not only on low fixed operating cost structures, but smart procurement approaches that lead to lower costs for consumers. Redbox, a DVD rental company, which services customers through an automated kiosk system at extremely low price points, is just such a company. A recent Chicago Tribune article provides some background information on how Redbox has built their business, despite significant attempted interference from the Hollywood establishment. And what a business it has become -- growing in "just five years" to an anticipated "20,000-location" operation by the end of 2009. What has Redbox done to drive this growth? They've blown up a traditional business model by delivering a similar product faster and cheaper. Here's how it works.

According to the Chicago Tribune, "Movies traditionally get released first in theaters, then the DVD version becomes available for sale or rental at full price, typically about $4. Finally, about 30 days later, the videos can be rented or seen online or on pay-per-view starting at about $2." But "Redbox has been able to go its own way because its business model, without brick-and-mortar stores, is inexpensive. Everything comes out of its machines for $1 ... Each box contains about 700 DVDs." Most important of all, new releases are priced at the same amount. In other words, consumers get a product at a price point roughly 50-80% lower than competing services (both traditional retail and online). Of course the Hollywood elite became extremely alarmed by such a model, worried that it "devalued" the entire industry, which has historically charged a premium for new releases in rental formats. To thwart Redbox, which refused to charge a premium for new releases, Hollywood refused to sell new releases to them.

But Redbox fought back, not only suing studios that refused to provide new releases at the same wholesale prices, but also taking more aggressive measures to secure supply. It's here where Redbox earned my respect for true procurement and supply chain creativity. To this end, "When Redbox can't get new movies directly from Hollywood, [the CEO] dispatches 800 Redbox employees armed with corporate credit cards to buy new DVDs at places such as Target and Best Buy the day they hit shelves." However ingenious this is, it still represents "an added expense because of the time involved, which includes stripping shrink-wrap from each box." But at least, until the Hollywood studios decide to settle the case against them, Redbox has found a way to keep playing by its own rules, delivering a product that's clearly in huge demand at a price point that no one else in the market can begin to touch (at least for new releases). Now if that's not Spend Management transforming a business model, I'm not sure what is.

Jason Busch

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