The candy machine just sold me an iPod

Popping up in military bases, airports, fast-food restaurants, and hospitals is a new kind of vending machine that offers everything from a DVD rental to a digital camera.

By , / Staff writer

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    Customers check the offerings at a Washington, D.C., demonstration of touch-screen vending machines. Some retailers now move electronics products using such machines.
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The future of retailing may be less about interacting with people than about negotiating with their machines.

Self-service stand-alone kiosks, offering everything from rental videos to digital cameras, are popping up in nontraditional public spaces like sidewalks, military bases, airports, fast-food restaurants, and hospitals. Retailers like Macy's, Best Buy, Blockbuster, Rosetta Stone, and Hot Topic have led the charge. The next growth spurt is likely to come from smart-phone technology, allowing consumers to order flowers or buy an iPod wherever and whenever they want.

In some ways, the new-generation kiosks are carving out a space somewhere between the online retailer and the conventional bricks-and-mortar store.

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"Consumers like to be in control of a transaction, whether it's checkout groceries at the supermarket or checking in for a flight at the airport," says Alexander Camara, vice president and general manager of NCR Entertainment, which launched in January its first run of kiosks selling digital music downloads. "What's interesting is the adoption curve has been extremely fast; this has taken people three or four years to get used to."

Macy's is a prime example. In 2008, it launched vending machines that sold electronics, from iPods to digital cameras ranging from $14.99 to $349.99. Branded "e-Spots," the machines were installed at international airport terminals, hotels, and 400 Macy's stores.

"They were able to sell electronics without having to open electronics divisions in their stores," says Michael Kasavana, a hospitality business expert at Michigan State University in Lansing. "It [also] provided an entree into the younger market" of people who probably would never think of buying headphones at Macy's.

If the machines offer consumers more convenience, they offer retailers higher profit margins. Mall retailers generate $330 per square foot on average while airport retailers average about $1,000 per square foot, according to ZoomSystems, a leading manufacturer of the machines based in San Francisco. Automated retail machines, by contrast, can earn between $3,000 and $10,000 a square foot and between $4,000 and $40,000 a square foot in airports.

Room for plenty of growth

The industry has a lot of room for growth, if Japan is any indication. The United States currently has 400,000 self-service kiosks, according to the Self-Service & Kiosk Association, based in Louisville, Ky. That works out to about 1 machine for every 750 Americans. In Japan, there is 1 vending machine for every 23 people, according to the Japan Vending Machine Manufacturers Association.

"They use vending machines for everything," says David Drain, executive director of the Self-Service & Kiosk Association. "They can buy a train ticket or a Coke with a mobile phone and all of it is a 24-hour service."

In the US, the most visible transition from conventional to automated retailing is in the video-rental market. Redbox, a Chicago area company specializing in $1 DVD rentals, launched its self-service kiosks in 2004. Five years and 19,000 units later, it was renting 350 million DVDs.

That poses a big threat to the traditional video-rental market. From 2008 to 2009, market share for bricks-and-mortar video-rental stores dropped from 63 percent to 47 percent, according to NPD Group, a market-research firm based in Port Washington, N.Y. In that same period, vending machines' share of the market grew from 9 percent to 20 percent.

Blockbuster joins the move

Not to be outdone, Blockbuster is also entering the self-service market. Through a partnership with NCR Entertainment, it launched Blockbuster Express, a series of automated kiosks renting videos for $1, in 2009. The company has already deployed 4,000 kiosks and expects to reach 10,000 by the end of this year.

NCR plans to go further into the entertainment field by launching kiosks that burn DVDs to "Secure Digital" memory cards, which allow the movie to play for only a short period of time, although the cards themselves can be reused..

One of the industry's biggest remaining hurdles is cost. Machines can run to $40,000 apiece. "If you're selling razor blades you have to sell a lot of product to recoup your cost," says Mr. Drain.

However, automated retail may help retailers manage costs, says Rory Gardner, an analyst with VDC Research Group, a Natick, Mass., company that studies the self-service industry. "Not only can self-service help you change the way you interact with current or potential customers, it can also help you change your retail landscape a little bit – not taking the place of employees, but allowing retailers to redistribute employees to more appropriate tasks."

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