A Vending Machine Selling IPods?

SAN FRANCISCO —  The iPod vendor stands in the corridor at the Macy’s Union Square all day and all night, never growing tired or tempted by the fragrance of rotisserie chicken from the nearby food court.

It’s the latest trend in self-service: a vending machine stocked not just with snacks and drinks but also electronic gear.

Zoom Shops, as they’re called, are spreading fast, finding homes in malls, hotels, grocery stores and airports across the country. San Francisco-based Zoom Systems makes and operates the machines, which debuted in March 2005.

Some kiosks, such as those at the Macy’s men’s and women’s stores here, sell only iPods and accessories. Others, catering to road warriors, feature bottled water, disposable cameras, beef jerky, skin-care products and even condoms in addition to electronics. And electronics giant Sony Corp. said this week that it would begin selling digital cameras, DVDs and other products through Zoom Shops.

Analysts say the high-tech vending machines can pack big revenue into a small space and cut down on shoplifting.

“I think they’re really onto something,” said Francie Mendelsohn, president of Summit Research Associates, a Rockville, Md.-based consulting firm for the kiosk industry. “You think of vending, you think of a can of soda, candy bar, bag of chips. To be able to get something as hot as an iPod is quite cool.”

Since the first machine appeared here in the Argent Hotel, which replaced its standard gift shop with a 24-hour automated version, more than 100 Zoom Shops have been installed in Northern and Southern California, Las Vegas, Denver and Atlanta.

Southern California locations include the Ontario Convention Center, Laguna Hills Mall, several hotels and Vons and Pavilions supermarkets.

Zoom Systems has secured more than $28 million in venture capital financing and plans to rapidly expand.

But success isn’t guaranteed. Consumers aren’t used to buying such expensive merchandise from a machine.

Bruce Quinnell, chairman of Zoom Systems and former president of bookseller Borders Group Inc., said he recently stood near a Zoom Shop in Las Vegas for several hours to watch people’s reactions.

Several wondered whether iPods, when ordered, would plunge from the top shelf and appear at the delivery door smashed, he said.

“They were thinking about a bag of Doritos or something,” Quinnell said.

The Zoom Shops may also conjure bad memories of having to slam one’s shoulder against a vending machine to dislodge a paid-for but trapped item.

In fact, the Zoom Shop uses a sophisticated robotic system -- developed by Sanyo Electric Co. and manufactured in the company’s plants in Tijuana and San Diego -- to nudge the selected product into a basket and whisk it to a door. The displays on many machines feature a “how it works” video to allay consumer worries.

Customers select their products by using touch screens, then swipe their credit or debit cards through a reader.

Zoom Systems says it charges the card only when a scanner system determines that the product has been delivered. Returns can be made through the company or at some Zoom Shop locations.

“You just have to deliver a great consumer experience and win the confidence of the consumer,” said Zoom Systems Chief Executive Gower Smith. “Our adoption rate is going to improve over time, as with any new idea like Internet commerce or ATMs.”

Zoom was born in 1998 from a printing supplies company Smith was running in his native Australia. He and his team developed a cabinet for automatically dispensing toner and ink in offices.

They began broadening their line to sell directly to customers, first considering a print-supplies kiosk in stores and then trying to replace hotel gift shops by selling greeting cards, books and novelty items.

The low profit margins on such products and developments in Zoom Systems’ delivery technology prompted the company to explore vending more expensive items. The company hitched a ride on the iPod craze and is striking deals with other electronics manufacturers to sell their products.

The Zoom Shop “morphed from a supplies cabinet to a self-service retail store,” Smith said. “It was more of an evolution than an epiphany.”

In most cases, Zoom Systems owns the product inventory, keeps the machines stocked and shares revenue with the hotel, airport or store providing space for the machine. Gower would not disclose the closely held company’s revenue or the cut given to partners.

Like most venture capitalists, Jeff Loomans, a partner with Sierra Ventures, usually throws away unsolicited investment pitches. But he brought one such proposal -- about Zoom Systems -- with him on a vacation to Hawaii because the machines struck him as “an intriguing, odd idea.”

He met with the company executives but couldn’t decide whether to invest -- until an epiphany struck one day at the gasoline pump. When he discovered that the credit card reader was broken, he drove across the street to another filling station rather than interact with the cashier.

“It was one of those ‘Oh, wow’ moments,” he said. “There’s an entire generation now completely more comfortable buying from machines than buying from a person.”

His firm has since invested $14.9 million in Zoom Systems.

Macy’s began with a two-machine pilot here in December. Shoppers would often stop as they passed the kiosk and move closer to the glass to get a better view of the colorful packages inside.

“They thought it was some sort of bizarre food,” said Lori Randolph, general manager of the Union Square stores.

A couple shopping in the Macy’s men’s store this week also were fooled. Phu Pham, 26, led Finnie Phung, 24, by the hand to the Zoom Shop near the front entrance.

“Oh, it’s an iPod machine,” he told her, admitting later that he believed it was a cologne dispenser since it sat near the fragrances department.

Neither was in the market for an iPod. But if they were, they disagreed over whether they would use a robotic system for purchasing one.

“I would,” said Pham of San Leandro, Calif. “No hassle, no salesperson.”

Countered Phung of Alameda: “People want to hold it, touch it, test it.”

But Randolph, the Macy’s executive, said she was surprised by how many people purchased iPods and accessories, which the department store wasn’t selling because electronics sales had been unprofitable. The Macy’s Zoom Shops carry different types of music players and accessories such as arm bands, power adapters, cases and headphones.

“We’re always in stock and there’s no line,” she said. “It’s a quick in-and-out transaction.”

The pilot project here persuaded Macy’s corporate parent, Federated Department Stores Inc., to announce last month that it would roll out the Zoom Shops in at least 180 Macy’s stores this fall. Macy’s also will test products from Sony Corp. and Motorola Inc. in the machines.

Eric Wold, a New York-based analyst with investment firm Merriman Curhan Ford & Co., said he initially had trouble imagining customers spending several hundred dollars at a vending machine. But when he saw them in action, his worries were put to rest.

“In a place that otherwise would be unused, this brings in increased revenue,” he said. “I think it’s a phenomenal idea.”

Mendelsohn, the Summit Research analyst, had a few more reservations. She wondered whether travelers would have much reason to buy iPods at airports, since the digital players don’t come stocked with music. And she questioned how long it would take consumers to get used to the idea of spending big bucks at a kiosk.

“In the past, what’s the most you’ve spent at a vending machine -- a $10 lottery ticket? I think that could be a big concern,” she said. “Then again, years ago people were afraid to buy on the Internet. Now generally you don’t hear that anymore.”