McDonald's hopes DVD rentals boost profits

updated 8:01 p.m. ET April 26, 2006

MINNEAPOLIS - The big red vending machine at the McDonald's whirrs and hums and spits out rental DVDs of "Chicken Little" and "King Kong" — and maybe, if McDonald's is lucky, profits.

Machines run by McDonald's Corp. subsidiary Redbox Automated Retail have popped up in hundreds of Golden Arches restaurants in six cities in an experiment to see whether they drive more customers into the stores. Rental chain Movie Gallery is experimenting with DVD rental machines, too, saying the machines will make rental transactions easier for customers and make its stores more efficient.

The spread of DVD rental machines comes as rental stores are struggling under a business model that hasn't changed much from the mom-and-pop video stores of 20 years ago. The rental business has suffered from the sale of cheap DVDs, rent-by-mail services like Netflix Inc., and expanding video-on-demand from cable companies.

"We think it's a tremendous opportunity," said Greg Waring, Redbox's vice president of marketing. "We think we're providing a new model for the industry that is going to be difficult for the traditional retailers to compete against."

About the size of a soda machine, each "Redbox" holds 500 disks and includes a touch screen so customers can pick a movie, and a credit-card reader for paying the $1-a-night fee. They don't take cash. Customers return the movies at the machine.

Signs near the machines promote its movies — kids' titles down low, movies for grown-ups on top. Redbox staffers load newly released DVDs each Tuesday. Redbox workers at the headquarters in Oakbrook Terrace, Ill., can monitor which titles are renting the most in each machine and adjust their selection accordingly. Generally there are 50 to 60 individual titles.

McDonald's came up with the idea in 2003 as it looked for ways to draw more people into its restaurants. It began experimenting with the machines in Denver in 2004 and now has 750 machines in restaurants in five cities, including the Twin Cities. It's measuring their popularity and whether they draw more people into the stores.

Its subsidiary Redbox isn't waiting to see how the McDonald's experiment turns out. It has placed the machines in 75 grocery stores, and has signed agreements for 400 more grocery locations, including Stop & Shop and Giant stores owned by Royal Ahold NV in the Northeast.

This summer, the company plans to let customers go online to check title availability in a particular location and rent a movie on the spot for pickup at that machine later.

Waring said their market share of all DVD rentals in Denver is in the low- to mid-teens, and that includes Netflix customers. Redboxes there average about 1,200 visits a week, including both the rental and return visit, Waring said. He said he didn't know how many of those customers ended up buying food rather than just stepping in to rent or return a movie.

"We have some very aggressive projections in terms of our growth, led by McDonald's locations," Waring said. "There's over 13,000 McDonald's restaurants in the U.S. We foresee a day when we're in the vast majority of those."

In Apple Valley, a suburb of the Twin Cities, Chris and Teresa Kliner stopped at a McDonald's for both a meal and a copy of Chicken Little for their daughters to watch during a visit with relatives in the Twin Cities. The Kliners, of Kenosha, Wis., used the machine to avoid signing up at Blockbuster to rent a single movie.

"With kids, it's easier this way, because they're not running all over the store," Teresa Kliner said while daughters Olivia and Analiese played on the slides at the restaurant's indoor playground.

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