Marketing Benefits Tops in
RFID Adoption, Says Study

Hadley Sharples Project Editor

According to a recently completed DePaul University study on the adoption rate of RFID at the individual product level, more benefit for retailers will be derived for marketing purposes versus warehousing and stocking cost-reduction benefits.

The study, sponsored by USA Strategies, was completed by graduate students at DePaul's Kellstadt Graduate School of Business, Chicago, under the direction of executive in residence Henry H. Rodkin.

"Adoption will occur far faster than expected due to the economic benefits and the new technology for producing RFID tags," says Patrick Yanahan, president of USA Strategies.

While retailers will achieve cost reductions in warehousing and stocking, the study predicts that the true benefits of RFID for retailers will be in enhanced marketing opportunities.

"This is going to be an exciting example of how technology developed for one purpose will turn into a significant marketing tool," states Rodkin. "Much like the original Internet was designed for networking national labs with researchers, it changed the world for everyone. This technology will change the landscape of retailing forever."

Tracking customers' purchases before they leave the store offers retailers information that can immediately be used for selling other related products. This allows retailers to communicate with shoppers while they are shopping in an effort to encourage them to buy an additional or complimentary item.

(A different report by the Boston Consulting Group found that the majority of visitors to the city of Boston were receptive to the use of information terminals offering suggestions for additional purchases, thereby assisting retailers in retaining consumers and increasing sales.)

Lastly, the implementation of RFID technology will offer retailers the ability to change their pricing moment by moment, depending on remaining inventories, thus maximizing their yield on high-demand items.

Several factors are driving retailers like Wal-Mart, Metro, and Tesco to push for RFID implementation, but on the supply-chain side, the significant advantage is the ability to remove inefficiencies by using real-time inventory information.

Real-time inventory information can help to prevent stock-outs, locate stock within a store to avoid shrinkage of inventories, and enable retailers to use more yield effective pricing strategies.

A recent study cited in the Harvard Business Review found that stock-outs cost retailers approximately 4% of sales. Consumers are not patient with stock-outs; in fact, fewer than half will purchase a replacement item, with almost a third going elsewhere to find the item. Across the retail industry, stock-out levels remain near 8% and represent a key issue that retailers hope to reduce with RFID.

For example, Procter & Gamble predicts that if it can reduce stock-out levels from a current level of 8-10% to 2-3% of sales, the return on investment in RFID would more than pay for itself.

Lastly, the use of real-time inventory information to track stock will enable retailers to provide a greater level of service and sales support. Sales associates will be able to see when and where stock will be delivered to a particular store, thus avoiding the request that customers check back to see if an item has been brought into the store.

RFID's ability to practically eliminate the need for the human checking of stock will allow labor reductions in receiving, stocking, check out, cycle counting, and physical counting.

One study estimates that effective RFID solutions can help retailers reduce a wide array of costs: 50-65% in receiving, 22-30% in stocking, 22-30% in checkout, 40-60% in cycle counting, and 90-100% in physical counting.

Another report estimates that shrinkage via customer theft, employee theft, and inaccurate inventory counts represents 1.69% in lost sales for retailers. RFID technology has the potential to alert staff when items are being removed illegally, or when they have been misplaced within the store, and could reduce lost sales to just 0.78%.

RFID also offers solutions to track sell-by dates of each product on the shelf. The collection and utilization of this information will help retailers maintain a better inventory management system that can react to demand much more quickly than with current systems. Further, says the above-mentioned report, the implementation of RFID would reduce by as much as 20% the cost of inventory write-offs that occur when goods are no longer fit for consumption.

However, says the study, there are several potential disadvantages for retailers implementing RFID, most noted among retailers being the justification of additional costs and an anticipated ROI timeframe. True cost savings are difficult to predict, but the culmination of sales and inventory data from RFID technology can better prepare retailers to avoid stock-outs and shrinkage.

A recent study by A.T. Kearney, a Chicago consulting firm, estimates that each retailer will have to spend an average of $400,000 per warehouse and an additional $100,000 per store for a typical RFID sensors and wiring package.

A.T. Kearney estimates each retailer will spend an additional $35 million to $45 million to integrate its software with RFID information across an entire chain of stores. Successful integration of inventory information is the most important RFID component to consider with regard to the retail industry, says the Kearney study.

Key to facilitating the use of these data is RFID middleware, which extracts data from the RFID reader, filters it, aggregates the information, and routes it to enterprise systems like a warehouse management system. Thus far, many retailers have cited issues with data quality, control and device monitoring, and management problems as obstacles to the implementation of RFID middleware.

Consumers, too, will realize benefits via RFID, including savings due to reduced costs in the supply chain and access to a better and fresher product, improved security/authenticity of prescription drugs, faster and more reliable product recalls, and improved food safety, for example.

On the down side, consumers don't know much about the realities of RFID, with many expressing concern with privacy abuses. Many consumers feel that the hidden placement of RFID tags could allow purchases to be tracked without their knowledge, leading to the creation of a global item registration system in which every physical object is identified and linked to its purchaser or owner at the point of sale or transfer. Consumers polled in RFID studies feel that if personal identity were linked with unique RFID tag numbers, individuals could be profiled and tracked without their knowledge or consent.

With consumer awareness about RFID as it currently is, several consumer protection groups are operating websites and blogs aimed at galvanizing support for legislation to limit RFID. The report recommends that companies cooperate with one another in developing a common voice, and launch a public education campaign to allay public fears regarding privacy.

Lack of awareness among consumers represents an opportunity for businesses to begin the education and communication process necessary to ensure a smooth transition and implementation for RFID. If businesses collectively fail to take the initiative to educate the public and create usage guidelines, consumer advocacy groups and government legislators will guide that process alone. This could impede the implementation process, as well as lead to widespread consumer disapproval.

Regardless, adoption of RFID in the retail environment is being stimulated by global retail giants, not by the inherent benefits of the technology.

Says the DePaul study, retailer mandates for product manufacturers to adopt RFID chips are forcing compliance, yet until the manufacturing sector integrates RFID to make their supply chain more effective, the implementation of RFID may stall.

As a result, the study concludes, widespread adoption of RFID technology will require an evolution in the marketplace — ultimately a shift from retailers pushing this technology to manufacturers demanding RFID.

As the manufacturing sector adopts RFID and integrates its technology within their existing systems, they will achieve economies of scale that will reduce RFID tag costs and middleware costs. This in turn will start to push the second tier of retailers to seek these cost savings. The process will continue throughout the retail supply chain until the full adoption of RFID becomes a reality.

Since RFID technology offers significant cost savings across the supply chain, has the potential to speed up the shopping experience, and provides retailers with advanced marketing opportunities, the study's authors believe RFID will evolve in three to five years (much faster than using the experience of adopting the original UPC systems as a model, which would take RFID adoption seven to 10 years to evolve, they say).

Because the monitoring and reduction of stock-outs will more than offset the capital requirements of systems at warehouse and retail, the study predicts adoption will occur over the next three to five years. The economic benefits are real, immediate, and significant when looking at retail sales measured in the hundreds of billions of dollars, the study says.

RFID installation is jointly affected by tag costs, middleware solutions, early successes, and consumer acceptance levels. High average tag cost is most often cited as the major barrier for manufacturers that are considering RFID. Tag costs are a function of scale as well as technology.

The accelerated adoption of RFID technology at the package level, however, depends on individual industry profit margins.

USA Strategies is working with several Metro Future Store Initiative partners (see sidebar on opposite page), and sees new technologies beyond current semiconductor manufacturing that will drive down the unit price as well as present application systems. New polymer chemistry and laser/ink-jet doping systems will not only lower the cost, but also lower the speed of application at the package level.

The progression of RFID tags from a label-carrier system to being truly embedded in the packaging structure will provide the packaging industry with a real solution to producing packaged products that satisfy the high-speed manufacturing demands of consumer packaged goods manufacturers. Over the next five to seven years, these new chemistries and embedding systems will further accelerate unit-level adoption.

Effective RFID solutions depend on totally integrated systems than can assimilate data to create decision-ready information, in addition to the necessary sharing of information with retailers. As with any new idea, there must be an overriding consumer benefit that finally solidifies the adoption of any sustainable technology. The ability to tie the consumer into the information chain is inherent in the macro software system.

The ability of the home system to talk to the retail store for reordering is already being studied by some major retailers. The added ability of the RFID chip to talk to a microwave oven to automatically set defrosting and cooking times is also being developed as of this writing. As consumers continue to seek time saving measures in their homes, in-home use of RFID enabled consumables and appliances will become as commonplace as the home computer.

Further, RFID adoption will significantly alter the advertising and promotion of consumer products. The ability for the retailer to monitor the shopping habits of the consumer in the store at the time of purchase will transform present models of communicating with the consumer. The power and effectiveness of presenting messages to the consumer will now fall to the retailer, giving them more economic muscle with the consumer packaged goods manufacturer.