CHICAGO -- An emerging generation of radio frequency identification tags promises reduced costs for manufacturers that have to put RFID labels on pallets and cases for retailers such as Wal-Mart Stores Inc. and Target Corp.

But that can't happen soon enough for many suppliers. Some IT executives said at last week's RFID Journal Live conference here that they have been studying business cases and exploring ways to use RFID data, and they have concluded that benefits won't materialize until tag costs dip below 10 cents.

"What Gen 2 is going to do, hopefully, is get everybody to use the same standard and consequently drive down the costs," said Gary Cooper, chief technology officer at Tyson Foods Inc. "I need the cost to really drop because we're moving hundreds of millions of cases a year and we're a fairly low-margin business. Just do the math: 20 cents times hundreds of millions."

Return on Investment

Cooper said that about 90% of the pallets and cases Tyson ships to Wal-Mart's Dallas-area distribution centers are now tagged. He added that Springdale, Ark.-based Tyson has developed business-case models showing a payoff from RFID by late next year or, more probably, in 2007. But tag costs have to hit the single digits for the company to see a return on investment, he said.

EPCglobal Inc., a not-for-profit organization that establishes and promotes RFID technology standards, finalized the UHF Generation 2 standard in December, and the new tags are expected to become available later this year. Tag makers, consultants and retail IT analysts said it could take anywhere from one to five years for the cost of Gen 2 tags to drop to 10 cents each.

Edwin Matthews, director of information services at Pacific Cycle LLC in Madison, Wis., said that if tag costs don't drop to 7 cents within the next 18 to 24 months, he will need to "have discussions" with the retailers that are requesting usage of RFID technology.

Matthews said that he has no quibble with the mandates and hopes more retailers hop on the RFID bandwagon to help drive up volume and lower the price of tags. "The cost," he noted, "truly is the tags."

Business Cases Solidify

Jeff Woods, an analyst at Gartner Inc., said tag cost has become a much bigger issue than it was nine months ago, now that some suppliers have developed potentially solid business cases for RFID.

"Six to nine months ago, the business cases were hope and faith," Woods said. "Today, we've got some reasonable leads on what the business cases would be, but they don't have a chance of clearing the existing tag costs."

For suppliers that ship only a small percentage of tagged pallets and cases to Wal-Mart, the payoff is farther away.

"There's not much use to the data until we can get to higher volumes," said an RFID project manager at a large maker of consumer products that is shipping only a limited amount of tagged cases and pallets to Wal-Mart. But large volumes won't be feasible until tag prices sink to the single digits, added the project manager, who asked not to be identified.

"This is the ultimate chicken-and-egg scenario," said Dennis Gaughan, an analyst at AMR Research Inc. in Boston. "More people won't do RFID until the tag costs come down, but the tag costs won't come down until more people do it. These guys are in a bad situation."