Franchise Lab Test: Coinstar (CSTR)

Buffett´s definition of a franchise is its ability to raise prices while retaining
customers. A franchise is like an inflation pass-through. A potential case
study for those seeking to test whether a company truly is a franchise is when
the company does raise prices.

Coinstar´s Share Price Drops on Price Hike

Today (Friday, October 28, 2011) we have Coinstar´s (CSTR) shares falling nearly 9% at midday, under pressure after the Bellevue, Wash.-based company /quotes/zigman/63447/quotes/nls/cstr CSTR -9.05% said late Thursday that it would raise the price of renting a standard-definition DVD at a Redbox kiosk to $1.20 a day from $1, effective Oct. 31. Blu-Ray DVD rentals will still cost between $1.50 and $2 a day.

In a statement, Chief Executive Paul Davis said the price hike, the first
for Redbox in eight years, was necessary due to higher operating expenses including recent increases in debit-card transaction fees, an outgrowth of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. (See how consumers get ¨protected¨by new regulation-the law of unintended consequences).

Read the entire article here:

Readers of this blog and students of Austrian economics are about as surprised to see rising prices-the effects of dollar debasement by the Fed-as being in a rain
storm in the tropics.

Lab Test

I am not implying that Coinstar is a franchise, but this is as close to a lab test as
you will see in investing. If you were analyzing Coinstar you would need to
monitor closely whether the company´s market share and profitability decline.
If either metric declines, then the company is not a franchise because the
company can´t pass through increased costs in the form of higher prices.

Be on the alert for potential case studies, there are lessons everywhere.

Coinstar´s Investor Relation´s website:

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