13/10/05 RFID: What Retailers Are Doing

Plenty of retailers have radio frequency identification (RFID)
initiatives in play; here's a high-level guide

We've already examined AMR's latest research on radio frequency
identification (RFID) technology to cover RFID's lack of a ROI case and
RFID's long-term strategic benefits.

AMR also discussed what retailers are doing with RFID currently. With
all the mandates and initiatives in play, it's worth looking at
individual cases one by one.
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Albertsons: Case- and pallet-level RFID in Texas, pilot tagging by a
small group of suppliers.

Best Buy: Case- and pallet-level RFID. Pilot tagging with major
suppliers next year, rollout in 2007.

Marks & Spencer: Tagging men's suits in nine stores. Tagging mandate
for suppliers. Trial expanding to 53 stores and other clothing
departments starting in 2006.

Metro: Future Store. Case- and pallet-level tagging. Extending RFID
implement to other stores and suppliers.

Target: Case- and pallet-level tagging in Texas. Working with small
group of suppliers prior to 2007 rollout.

Tesco: Item-level tagging of DVDs. Doing DVD tracking in two stores,
plans to include eight more stores.

Wal-Mart: Live in 104 Wal-Mart stores, 36 Sam's Clubs, and 3
distribution centers in Texas. Working with first group of mandated
suppliers.

AMR went on to add what retailers are not doing. For example, "the
concept of store-wide tagging of all products is a decade or more
away." That's no big surprise, since the economics forbid such a
tagging initiative. But consider the fact that "No retailers are
focusing on deploying RFID tag reading in DCs [distribution centers]
and stores as proof of delivery..." That's a curious omission given
that, as AMR says, "this single use of RFID could justify their tagging
investment."

The bottom line is that, even though RFID isn't delivering sound ROI to
retailers, it has both long-term strategic value and some untapped uses
that could improve the existing ROI case. Retailers should take note.

Retailers search for ROI from RFID

Just when things are starting to look better for the red-hot RFID
market, along comes an industry analyst to throw water on the fire. In
this case, it's AMR Research, which published a study last week that
questions whether retailers will ever benefit from case- and
pallet-based RFID rollouts. The study, "RFID and Retail: Little Return
for Case and Pallet Tagging" took away some of the momentum the
industry had gained from several announcements about lower pricing and
increased production for RFID tags and equipment.

The study says that although many retailers believe RFID will
eventually transform their supply chains and make their operations more
efficient, even thought-leading retailers haven't been able to develop
a clear-cut case for advancing from the pilot stage to an
enterprise-wide rollout of the technology.

The discouraging projection is based on a mock case study AMR did on a
fast moving consumer goods retailer with annual sales of $5 billion,
and an operating margin of 3.25 percent. The retailer took three years
to fully roll out RFID at eight distribution centers and 200 stores, at
which time the number of tagged products expanded from 15 percent to 45
percent of SKUs.

In the end, AMR says, there weren't enough savings to cover an
enterprise rollout. The overall cost of rolling out the RFID
infrastructure—including readers in stores and DCs, increased
networking and storage costs, and enhancement of existing supply chain
software—was estimated at $39 million. With its slim margins, the
company would need to generate an additional $1.2 billion in sales to
create a positive ROI in three years. However, the firm fell far short
of that goal, and even labor savings of $2.5 million were too low to
impact ROI.

"We focused on fast moving consumer goods and on the case/pallet
initiatives going on and that's what we couldn't find ROI for," says
Kara Romanow, an analyst at AMR and a co-author of the report. "Even
when we tried to push the buttons a little bit and adjust the
infrastructure costs so it's not as expensive, it wasn't enough to
throw enough cash to justify the entire project."

Even by year four, the study predicted that the RFID project will have
reduced the retailer's effective out-of-stocks rate by only one half a
percent. This small decrease will generate enough revenue to cover the
cost of the initiative, but profits will be negligible—only about $4
million after cost savings have been factored in. Therefore, Romanow
says that retailers will find that case and pallet tagging alone will
not create a positive ROI, even many years out.

"Even RFID boosters will have to admit that there are plenty of other
potential uses for the $39 million in capital that are more likely to
deliver a significant bottom-line impact, including those technologies
more focused on direct profit improvement, including pricing and
promotion systems, category management workflows, and retail workforce
management applications," the report says.

Romanow emphasizes that the results don't mean that retailers should
necessarily abandon their RFID ventures. She says that working in
concert with other technologies—like demand forecasting systems, vendor
collaboration tools and new replenishment and retail planning
applications—RFID can provide benefits.

"The thesis is that generating enough true ROI to support a chain-wide
case-pallet rollout is difficult," says Romanow. "The report doesn't
say you shouldn't do RFID, but that you need to understand where, when
and how to use it. Once you have an RFID infrastructure in place you
can do lot more with things like data visibility, analytics, and
targeted item level support."