Study: 2006 a Disappointing Year for RFID and Retail

News Analysis: A new report paints a portrait of frustrated suppliers and very isolated pockets of ROI for the pallet- and case-tagging market.

When it comes to the meat-and-potatoes of the RFID retail business—the tagging of pallets and cases—2006 is going to go down as a very disappointing year.

A new report from Cambridge, England-based IDTechEx paints a sad but realistic portrait of frustrated suppliers and very isolated pockets of ROI examples. It does, however, hold out hope for a somewhat brighter 2007.

"The pallet/case market for RFID tags became the nearest thing to a black hole in the RFID universe in 2006," said IDTechEx CEO Raghu Das, who attributed the problems to "reluctant mandated customers, technical problems and pricing for volumes that never came despite retailers reporting excellent paybacks. Tagging the display unit is very different from tagging the pallet and cases."

IDTechExs conclusions mirror what has been reported by other industry observers, including IDC and IHL. Like anything else with RFID, it can be misleading to refer to "the RFID industry" as though its a single entity.

Consider the strong RFID activity shown in contactless payment (evidenced by 7-Eleven and Jack-in-the-Box, which went so far as to launch nationally with barely a regional trial) as well as in item-level parts tagging (best illustrated by Boeings parts-tracking efforts on its latest airliner) and RFID display efforts (such as Procter & Gambles work on tweaking promotion timing).

Those efforts have little in common with the core pallet/case efforts. Ironically, it was supposed to be the pallets and cases where RFID would shine, with niche efforts like contactless and item-level tagging taking much longer.

One long-time RFID observer—Paula Rosenblum of the Retail Systems Alert Group—agrees with the reports conclusions but argues that RFID has become so large and has gone in so many different directions that its components need to be discussed separately.

"I think the time has come to de-couple the various and sundry technologies that are known as RFID. Some of them have near-term benefits while EPC is still years away from generating value," Rosenblum said. "Asset management, traceability and contactless payment hold shorter-term promise. RFID on totes has been delivering value for years. But the two-penny tag is still years away and is an application in search of value for most retailers."

/zimages/5/28571.gifRFID vendors are raising the stakes with new products. Click here to read more.

The IDTechEx study found "considerable foot dragging" among consumer goods manufacturers "resulting in pallet/case tag purchases being as little as 250-300 million tags in 2006 at the heavily loss-making price of around 10 to 15 cents each. Readers are also being sold at a heavy loss."

The report concedes that there have been some impressive ROI case studies this year from P&G, Wal-Mart and others, but said the benefits realized typically were "not necessarily paybacks and companies are not saying they are sustainable."

Pete Abell, program director for RFID with IDCs Manufacturing Insights unit, said IDC is still crunching its RFID figures "but this is definitely in line with our own global research. [Real-Time Locator Systems], active and contactless payment are the growth areas with case and pallet way behind due to ROI and technology issues."

IHL President Greg Buzek said some of these efforts—especially true item-level tagging—need more serious demands by retailers before they will happen.

"This is how anti-theft tagging became popular, because Wal-Mart, Home Depot and others basically told suppliers they will source-tag the products or they will not sell through their stores. But in that case, we were talking 1-2 cents a tag. With RFID, even the most optimistic tag costs are in the 12- to 15-cent range so they are 6x or more higher than where they need to be," Buzek said. "The exception to this [is] retailers that specialize in garments. Here they can absorb the cost of the tag and get the benefits to offset tag costs. This is why RFID will be a hit at the item level for specialty and department stores much faster than anywhere else. The benefits of instant inventory awareness and supply chain savings/seasonal turnaround make sense here."

The RFID industry challenge is the classic chicken-and-egg dilemma. Retailers can push RFID aggressively, but if suppliers dont have the ROI incentive to do so, they will be so unenthusiastic as to make the success of the effort almost impossible, lessons that U.K. retail giants Marks & Spencer and Tesco have been learning.

/zimages/5/28571.gifRecent RFID trials are showing mixed results for RFID, with retailer Marks & Spencer declaring its test a success and preparing to add more test stores. Click here to read more.

In short, both suppliers and retailers have to have their self-interests advanced by RFID to make the process work any time soon. Thus far, that hasnt happened.

"RFID hardware suppliers that had prioritized the retail sector started to look elsewhere (in 2006), though none left the sector altogether because they know there will be a winner one day and most have strong backing," the IDTechEx report said. "They are playing Last man standing. There is oversupply, although some system integrators make money."

It wont work well if all of the happiness is on the retail side. "The RFID tagging of pallets and cases for major Western retailers of fewer than 400 million pallets and cases over two years has already improved their margins by as much as $100 million. This was provided at a loss of about $100 million by the consumer goods companies that supply them," Das said. "In addition, the RFID suppliers to these consumer goods companies also lost about $100 million in the exercise. In the case of the RFID suppliers, that money came from investors and parent companies. It was certainly not predicted that those investments in RFID companies would, in effect, flow rapidly to the large retailers.

"System integrators are faring better, with some even claiming to make money installing pallet/case RFID infrastructure at CPG companies and retailers. At least with anti-theft tags earlier mandated by retailers, the tag and system suppliers to the mandated CPG companies—notably Sensormatic (now in Tyco-ADT) and Checkpoint Systems—stayed profitable because they did not price for volumes that never came. However, anti-theft tags did and still do cost the CPG companies heavily for no return and pallet/case RFID is history repeating itself."

The report also tried showing where global RFID dollars and trials were happening and found the efforts rather lopsided. "The U.S. is the greatest adopter, with by far the largest number of cases of RFID in action and orders that are often the worlds largest by value. It has even pulled ahead in the last year, with more than 840 recorded projects," the report said. "More surprising is the UK holding second place by number of cases, though not the money spent, where China has more claim to fame and Korea and Japan are strong rivals. Remarkably, Australia has jumped from number ten to number seven."

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