RFID in Retail Industry

© 2005 USA Strategies, Inc. Willowbrook, Il 60527 USA

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RFID Adoption in the Retail Industry

The inevitable change from printed UPC identification of industrial and

consumer products to Radio Frequency Identification (RFID) systems has been written about for several years. This study recognizes that inevitability but addresses the rate of such adoption specifically at the individual package (unit) level. This study was managed by Henry H. Rodkin, Executive in Residence, DePaul University in Chicago, Illinois and Patrick Yanahan of USA Strategies, Willowbrook, Illinois who commissioned the investigation. The adoption rate of the original UPC systems was used as the model for potential adoption rate of RFID systems. Logic suggested that seven to ten years would represent a reasonable timeline based on historic trends, but accelerated somewhat by today’s industry acceptance of technology unlike the sentiment in the early 1970’s. The results of this study suggest that major economic savings by the retail industry, upcoming changes in RFID chip fabrication and consumer marketing benefits will accelerate adoption far faster than previous thinking has considered realistic.

A Research Paper prepared by

May 2005

222 Midway Drive Willowbrook, Illinois 60527

U.S.A.

T: 630-920-1929 F: 630-920-1935


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Overview Three retail giants across two continents are among the true drivers of RFID technology throughout the retail industry. Wal-Mart in the US, Metro in Germany and Tesco from the UK have already integrated RFID technology into their respective supply chains. Wal-Mart’s January 2005 mandate that their top 100 suppliers ship only goods with RFID chips at the pallet level has forced the entire industry to recognize the RFID’s time has come. On January 17, 2005 Linda Dillman, Wal-Mart’s Senior Vice President and CIO, reported that 57 suppliers were live with RFID tags, with more hoped to be on line by the end of the month. While speaking at the National Retail Federation’s trade show, representatives from Wal-Mart, Metro and Tesco all reported initial success with RFID, but stressed that the true benefits would still take time.i Several factors are driving retailers to push for RFID implementation, but the significant advantage is the ability to remove inefficiencies from current supply chain management by using real time inventory information. Retailer Advantages Real Time Inventory Information: RFID provides retailers with real-time inventory information that can help to prevent stock outs, locate stock within a store to avoid ‘shrinkage’ of inventories, and can help to enable retailers to use more yield effective pricing strategies. A recent study cited in the Harvard Business Review looked at survey data from 71,000 consumers in 29 countries to decipher what shoppers do when they face a stock out of a desired product. The results confirmed what many retailers feared. Across the entire retail industry stock outs on average, cost each retailer 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.ii Across the retail industry stock out levels remain near 8%, and represent a key issue that retailers hope to reduce drastically with RFID.iii One manufacturer currently using RFID technology to help reduce stock out statistics is Proctor and Gamble. Paul J Grieger, the director of supply-chain innovation at P&G recently noted that if the company could reduce stock out levels from 8 to10% to more like 2 to 3% of sales, the return on investment in RFID would more than pay for itself.iv 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 able to see when and where stock will be delivered to a particular store, thus avoiding the relentless request that customers ‘check back’ to see if an item has been brought into the store.


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Decreased Labor Costs: RFID provides technology that practically eliminates the need for human checking of stock. Labor reductions will be realized in the following areas of retail operations; receiving, stocking, check out, cycle counting and physical counting. Accenture estimates that effective RFID solutions can help retailers reduce a wide array of costs: receiving by 50 to 65%, stocking by 22 to 30%, checkout by 22 to 30% cycle counting by 40 to 60% and physical counting by 90 to 100%.v Prevention of Theft, Shrink and Inventory Write Offs: ‘Shrink’ is a retailing term used to describe inaccurate inventory counts as a result of customer theft, employee theft, inaccurate inventory counts due to misplaced items, and stock reordered because items are on a display shelf in another area of the store. The 2000 Retail Survey Report estimates that shrink represents 1.69% of sales for retailers.vi RFID technology has the potential to alert staff when items are being removed illegally, or when they have been misplaced within the store. This can assist in theft reduction and also provide real-time accurate inventory counts automatically. Inventory write-offs occur when goods are no longer fit for consumption, the goods are no longer in demand by consumers, or they have been damaged while in the retailer’s possession. RFID technology 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 current systems. The Accenture team estimated that the implementation of RFID technology will seek to reduce retailer ‘shrink’ from 1.69% of sales to an impressive 0.78% of sales. Furthermore, they maintained that the implementation of RFID would reduce the cost of inventory write offs by as much as 20%.vii

Totally Integrated Opportunities: In addition to improving the Supply Chain, the advent of RFID technologies will offer retailers new and unlimited marketing opportunities. Tracking a customers’ purchases before they leave the store offers retailers information that can immediately be used for the cross selling other related products. In-store suggestive selling allows retailers to communicate with shoppers while they are shopping in an effort to encourage them to buy an additional and/or complimentary item. A report conducted by the Boston Consulting Group on the success of the Metro Group’s Future Store in Rheinberg Germany showed that the majority of visitors were receptive to the Information Terminals offering cross-selling suggestions. The most valuable computerized cross-selling terminal was for wine pairing. 64% of the respondents ranked it as ‘highly valuable’.viii Although it is difficult to estimate a value for these marketing opportunities, it would undoubtedly assist retailers in retaining consumers and increasing incremental sales.


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Lastly, the implementation of RFID technology will offer retailers the ability to change their pricing moment by moment. Real time inventory can allow for automatic price changes to be made depending on the remaining inventories. Retailers will be able to maximize their yield on high-in-demand items. The concept is similar to the system of selling airline seats. Yielding maximum prices for items according to store supply and demand levels will increase incidental sales for all retailers. Retailer Disadvantages

Cost and Return on Investment: The most cited RFID issue among retailers is the justification of additional costs and the anticipated ROI time frame. The true cost savings are difficult to predict, but the culmination of sales and inventory information (from RFID technology) can only 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.ix It is not the cost of the hardware to read RFID sensor chips that is worrying the retail industry; it is the integration of existing software with RFID information. A.T. Kearney estimates each retailer will spend an addition $35 to $45 million to integrate their systems across an entire chain of stores.x

Middleware Issues: Successful integration of inventory information is the most important RFID component to consider with regard to the retail industry. RFID middleware extracts the data from RFID reader, filters it, aggregates the information, and routes the data to enterprise systems like a Warehouse Management System. Many retailers have cited issues with data quality, control and device monitoring and management problems as obstacles to the implementation of RFID middleware.xi Consumer Feedback: Metro AG’s pioneering Future Store is the first entire operation to fully utilize RFID technology in order to streamline the supply chain and integrate customized marketing opportunities. The Boston Consulting Group published a report on the workings of the Future Store, which showed increased customer satisfaction. The share of customers that chose either fully or highly satisfied rose from 34% to 52% after the store changed from a traditional retailer to the “future store” model.xii Improved customer satisfaction ratings have propelled the Future Store, however not all customers are convinced. In fact the same study showed that although 42% of customers are using the store more frequently a 20% of customers surveyed are using the store less frequently. More recent in store intercepts are showing that percentage decreasing monthly.


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Not all consumers will happily utilize the RFID related technologies available to them. Clearly, it is important to analyze each specific market before moving forward with total implementation. RFID and Consumer Adoption Overview Currently, consumers are relatively oblivious to the RFID technology and capabilities. However, there are a number of consumer protection groups that are operating websites and blogs aimed at galvanizing support for legislation limiting RFID and what companies can do with the technology. In the short term, companies would be wise to cooperate with one another in developing a common voice and launch a public education campaign to allay public fears regarding privacy. Consumer Benefits Consumer Savings: Most notably, consumer savings will result due to decreased costs in the supply chain. Currently, companies approach supply and demand in the only way that they know how. They produce goods in the hope that customers will buy them. Of course, historical information and trends are utilized, but it is by no means an exact science. Conversely, RFID will allow companies to better match up supply and demand. Manufacturers will not produce vast quantities of product that will not sell and retailers will not overstock excessive amounts of product destined to sit on store shelves gathering dust. RFID will enable companies to more quickly identify goods that can need to be discarded or replenished. This in turn will give the customer access to a better and fresher product. In the long term, this will also lead to a decrease in pricing for the consumer. Improved security/authenticity of prescription drugs: RFID will be used to distinguish genuine products from counterfeit products. This is a key consumer benefit given that counterfeits could potentially contain decreased dosages and elements as opposed to the “genuines.” Currently, consumers have no “fool-proof method of vetting their prescriptions which could lead to potential health issues associated with ingesting counterfeit drugs. Efficient Recalls will reduce Deaths and Injuries: Faster and more reliable product recalls along with improved food safety. RFID can be used to identify and recall outdated products, which will further enhance consumer safety.


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Consumer Drawbacks Hidden placement of tags: RFID tags can be hidden in objects and documents without the knowledge of the individuals who purchase the items. As radio waves travel easily and silently through fabric, plastic, and other materials, it is possible to read RFID tags sewn into clothing or affixed to objects contained in purses, shopping bags, suitcases etc. Unique identifiers for all objects worldwide: The EPC potentially enables every object on the planet to have its own unique identification code. This technology could lead 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. This is potentially a positive in some respects but in terms of privacy issues, it could lead to serious abuses.

Massive data aggregation: RFID technology requires the creation of massive databases containing unique tag data. These records could be linked with personal identifying data, especially as computer memory and processing capacities expand. Again, the main concern here from a consumer perspective is privacy. Hidden readers: Tags can be read from a distance. Readers could be placed (out of sight) into nearly any environment where consumers or products are located. RFID readers have already been experimentally embedded into floor tiles, woven into carpeting and floor mats, hidden in doorways, and seamlessly incorporated into retail shelving and counters, making it virtually impossible for a consumer to know when or if he or she is being "scanned." Once again, without regulation, there is the potential for any number of abuses. Individual tracking and profiling: If personal identity were linked with unique RFID tag numbers, individuals could be profiled and tracked without their knowledge or consent. For example, a tag embedded in a shoe could serve as an identifier for the person wearing it.

Cap Gemini Findings on US Consumer Attitudes toward RFID A recent Cap Gemini study for the National Retail Federation indicated that few consumers were even aware of RFID (in the U.S. only 23%xiii), which means that for the most part, consumers have not formed strong opinions on the subject. Lack of awareness represents an opportunity for businesses to begin the education and communication process necessary to ensure a smooth transition and implementation for RFID on the unit level.


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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 severely impede the implementation process and also lead to widespread consumer disapproval. According to the Cap Gemini Consumer Study, of the 23% of consumers who have heard of RFID technology, 42% view it favorably, 31% had no opinion, 17% didn’t know and 10% had an unfavorable opinion. One issue that elicited a fair amount of consumer concern was price. In spite of the fact that Wal-Mart has said it would not accept increased costs from suppliers as they applied RFID tags at the case and pallet level, that message has not filtered down to the consumer. One consumer in the group said, “Any new technology means a raise in the cost of the product.” Overall, 41% of the consumers in the group said that RFID would increase the cost of goods, 17% said it would lower the cost, 18% said it would have no impact on the costs and 25% said they didn’t know. Of the consumers who participated in the Cap Gemini study, women tended to rank many of the potential benefits from RFID as being more important than the rankings given to the same benefits by the men participating in the sample. Women responded positively to the security issues related to prescription drugs, to the possible consumer savings and improved food/safety quality. Further trends indicated that consumers age 25-49 in the group tended to rate the benefits as more important than other age segments within the group. Consumers in the study indicated they had serious concerns involving a variety of categories. 69% were “extremely concerned with consumer data being used by a third party, followed by 67% being concerned with being targeted more with direct marketing, 65% were concerned about tracking of consumers via product purchases, 56% expressed concerns regarding health issues stemming from RFID, 45% were concerned with the environmental impact possibilities, 43% expressed concern with RFID tags that can’t be eaten/dissolved and 42% expressed concern that tags could be read from a distance. Companies Should Take Steps to Ease Consumer Privacy Concerns

Vocal critics of RFID technology like the Electronic Frontier Foundation (Lee Tien, Attorney) have said that consumers are currently incapable of accurately gauging the value of the privacy they might be tempted to trade away based on an incremental benefit afforded them through the use of RFID.xiv Numerous RFID opposition groups are currently publishing opinions and information regarding the technology. Unfortunately, the vast majority of companies are not countering this criticism with public education campaigns of their own. According to EPCglobal’s (a newly formed subcommittee of the RFID industry) guidelines, companies should adopt a EPC public relations plan now. Beginning an open dialogue with consumers now as opposed to later will be a valuable step in


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widespread RFID adoption and acceptance. EPCglobal recommend four main steps to help prepare the public for RFID unit level technology:

1. Consumer Notification—consumers should be given clear notice of the presence of EPC/RFID tags on products or packaging through the use of an EPC logo or identifier.

2. Consumers should be informed that they have a choice to remove or disable EPC tags from the products they purchase

3. Consumer should have the opportunity to easily obtain accurate information about EPC and its applications as well as information about advances in the technology.

4. As with UPC technology, companies will use, maintain and protect records generated through EPC in compliance with all applicable laws. Companies should publish on their websites, information regarding the retention, use and protection of any consumer-specific data generated through their operations.

Current Government Regulatory Steps As is the case with many situations involving new technology, laws and regulation are not yet in place to regulate usage and implementation of RFID. Amid concerns regarding consumer privacy, a number of US lawmakers are in the process of introducing bills and legislation aimed at curbing possible infringements on consumer privacy. In February 2004, California State Senator Debra Bowen introduced a bill to address privacy concerns associated with RFID technology. State Senate Bill 1834 states: "This bill would require a person or entity that uses radio frequency identification (RFID) systems to comply with certain conditions, including obtaining an individuals written consent before attaching or storing personally identifiable information with data collected via an RFID tag or before any personally identifiable information collected via an RFID system is shared with a third party. The bill would make a violation of the bill an act of unfair competition that is subject to specified enforcement provisions, including actions brought by the Attorney General or a district attorney or city attorney." The bill would apply to any business or state government agency using RFID systems to track merchandise or people. The proposed bill would require businesses and agencies be required to notify people that RFID systems are in use. If passed, the bill will also require that consumers give their express consent before businesses or agencies track and collect information about them using RFID. Finally, the proposed legislation would require retailers to detach and/or destroy RFID "tags" on merchandise prior to removal from the store.


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Next Steps with Consumers

Clearly, RFID tagging on the unit level will benefit not only manufacturers and retailers but also consumers. Widespread consumer awareness of RFID has not yet occurred and the good news is that consumers that are aware of the technology have a relatively positive outlook on its prospects. Unfortunately for retailers and manufacturers, consumer activist groups are currently providing the public at large with its main source of information regarding RFID. Most of this information focuses on the prospects of consumer privacy invasion issues. The bottom line is that businesses need to begin public relations campaigns of their own with regard to RFID. If consumer groups continue to be the only voice being heard by the public, the public is more likely to view the issue totally from that viewpoint. One common voice of communication is necessary to inform consumers that their privacy will be protected and that many consumer benefits will come as a result of new RFID technology. UPC and RFID: Comparisons and Contrasts Overview

When looking for timeline comparisons on grand scale technology implementations in the retail industry, the UPC bar code changeover is probably the closest example to examine when determining what the current RFID/ePC roll-out will look like.

Advantages of UPC and RFID The Universal Product Code is currently used worldwide to quickly recognize product types in standardized databases. Many industry experts predict that RFID technologies will replace the printed bar code. MACtac Technical Products produced this chart on advantages/disadvantages of RFID.

Advantages of Bar CodeLower cost Ease and Speed of ReadingSolutions are proven Item specific informationLower start-up/quicker ROI LongevityEnd-user confidence Volume of DataExisting compliance standards Dynamic Information/Rewriteable

Improved SecurityAuto locate tagged items

Advantages of RFID

UPC History


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UPC was first envisioned in Wallace Flint’s master’s thesis in 1932. Flint believed the punch card system used in the 1890 census was a genius innovation and thought that it could revolutionize the retail world. He pictured stores where instead of picking up products, customers would pick up punch cards, the cashier would run them through a tabulator and a series of conveyors would bring the purchases to the front. While the technology was not around to support this idea, retailer’s agreed an automatic coding system would be beneficial. In 1948 Bernard Silver overheard a couple men talking about the necessity of an automated checkout system. He mentioned it to his fellow graduate student at Drexel University and the two began working on the problem. Woodland and Silver patented the bull’s eye code in 1949, inspired by Morse code and movie soundtrack reading devices. Those early proto-types initiated that the technology leaders of the day, (RCA, IBM) begin developing systems of their own. In 1970 McKinley & Company predicted a retailer could save $150 million a year by adopting a coding system. However, various manufacturers, product types and retailers adopted many different product codes and this prevented a greater number of open source benefits. The lack of standardization prevented larger and quicker leaps in technology because developers were not working with compatible systems. Real buy-in to code based tracking didn’t happen until the Uniform Code Council (UCC) development of a standardized code, the UPC in 1973. The UPC chose barcodes over bull’s eye and other options because there are less expensive and simpler than other options.

By the early 1970s costs lasers had fallen drastically. The inexpensive laser readers and integrated computing circuits were two big developments that bolstered the barcode technology. Manufacturers’ out-of pocket expenses for UPC packaging in 1973 were estimated at $200 million however, many industry leaders felt they would pay for themselves in just a few years. John Johnson, a pioneer in the UPC implementation, felt that heads of large food chains would resist the technology on the basis that they did not want to know how much money they had been losing in missing shipments, inventory stock outs and labor costs. Furthermore, concerns were growing against the UPC from a public that did not understand it. UPC is a hex-based code using six digits as placeholders; religious groups interpreted this somehow as a sign of the devil and Mr. Johnson said that he encountered resistance from some franchises on this rumor. Fears and reluctance aside on June 26, 1974, in Troy, Ohio, a pack of gum was the first product purchased and scanned with a UPC. From there the growth was slow but steady. Estimates (of the time) implied that 85% of all consumer package goods would have to carry a UPC marking for the implementation to pay off. Manufacturers began printing the bar codes on the labels in the mid 1970’s and from there the technology took off. UPC hardware provider BASICS states that by 1978 only 1% of stores used barcodes, however by 1981, 10%; 1984, 33%, the current level of between 60% and 75% was reached in the early 1990s.


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Percentage of US Retailers w/ UPC Scanners Installed

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Another factor the exponential growth can be attributed to is the product stage lifecycle. Early movers realize early cost savings but also initiate the technologies by spending capital in development costs. As other firms in the retailing industry realized that the UPC system was becoming necessary to compete they began the changeover. Late movers might be the independent grocers, smaller chains and other niche retailers that felt the cost-savings was not beneficial on their smaller scale.

While UPC and RFID developments seem to be quite closely related and on the surface they are, there are many distinct differences in their implementations. An early hindrance to the UPC was lack of standardization that led developers at different firms to double each other’s work and lose any cross-functionality efficiency.xv RFID technologies have avoided this problem when the UCC formed the ePC (electronic product code), which will allow pioneers to move forward with the knowledge of what technical parameters to follow. Jimmy Atkinson at the RFID Gazette concurs, “Technical standardization will bring down the cost of RFID drastically.” Primarily, retailers drove the UPC rollout with front of store applications in mind.xvi Many stores did not give much forethought to how it would benefit backend cost savings or supply chain management. Mr. Johnson suggested that many retailers of the time had no idea what the UPC could save in terms of inventory control and some were wary to find out how much money they had been losing over the years. RFID/ePC is driven by the large retailers, such as Wal-Mart and Carrefour, as evidenced by the mandate that their 100 largest suppliers must be RFID compliant at the pallet level by this year. With these large manufacturers adopting the ePC and taking the brunt of the development costs second tier retailers and manufacturers will soon find ways they can utilize the ePC to their benefit.


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Much of the retailers’ UPC hardware and training cost burden was lessened by third party data-mining firms that would provide scanners and education in turn for the use of all the point of sale data collected by these devices.xvii These firms would then use proprietary software to analyze the data and then sell the findings to manufacturers and marketing firms. As the ePC replaces the bar code, it is likely that the large marketing research firms (e.g. Nielson, Gallup) will have paid a share of the costs. A relevant comparison between the UPC and RFID can be made. From introduction in 1974, it took UPC fifteen years to become truly efficient. Because today’s retail environment is much more conducive to change and early standardization, the ePC should be implemented quickly. However, higher overall costs and initial costs will likely hinder the rollout. Furthermore, most front-of-store savings will not be available until the majority of products are tagged. When compared to the UPC rollout, the full implementation of the ePC at the unit level is still 7 to 10 years away. Summary of Research Findings The Necessary RFID Condition To truly understand the challenge of forecasting RFID adoption rates at the unit level, we first created a macro economic condition necessary for the implementation of RFID technology throughout the supply chain:

Increase In Profits

Money Saved

Fixed Costs

Variable Costs>+ +

Increased Sales

Reduced Stock-Outs

Reduction in:• Labor Costs• Waste• Inventory Carrying Cost• ‘Skrinkage’• Recalls• Inventory ‘Write-Off’s’

Hardware&

Middleware

Tag Costs

The Economy Regulations Consumer Acceptance

The Necessary RFID Condition:


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Once these conditions are met across the entire supply chain will the adoption of RFID become feasible and widespread? Examining UPC for Implementation Indications of RFID In order to calculate the timeframe for unit-level implementation of RFID technologies, we looked to the implementation of UPC codes for similarities in their adoption rates. Widespread adoption of UPC codes was hindered by a lack of standardized codes; meaning it took almost 15 years for UPC barcodes to become truly efficient. Although today’s commercial environment is much more ready to adopt new technology, and standardized ePC codes already exist. Logic then supports that RFID will not see widespread adoption at the unit level for at least 7 to10 years. In today’s business environment tag costs and middleware software issues are stalling the unit-level adoption of RFID technology. The premise that RFID unit-level tagging is still 7 to 10 years away is based on the lessons learned from the UPC rollout during the 70s and 80s. Our research also analyzed the role of the Retailer and Manufacturer as drivers of this technology going forward. Evolution in the Marketplace RFID technology has been in existence since the 1950s, yet today’s adoption of RFID in the retail environment is being stimulated by global retail giants; not by the inherent benefits of the technology. Retailer mandates pushed on 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. Integrated RFID technology not only provides supply chain cost savings, but also provides retailers with integrated marketing opportunities, and the ability to speed up the service experience in stores. Although truly valuable, neither of these benefits can be realized until RFID tags appear at the unit level. As a result, we conclude that widespread adoption of RFID technology will require an evolution in the market place – 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, which will reduce RFID tag costs and middleware costs.xviii This evolution of the retail marketplace is best illustrated in the following diagram:


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Tier One Manufacturers

Tier One Retailers

Tier Two Retailers

Tier Three Retailers

Tier Three Manufacturers

Tier TwoManufacturers

Private Label Goods

Today top tier retailers are forcing major manufacturers to adopt RFID. However, going forward there needs to be an evolution in the marketplace where manufacturers fully adopt this technology. This will start to push the second tier of retailers to also seek these cost savings. The process will continue throughout the retail supply chain until the full adoption of RFID becomes a reality. Although the supply chain benefits of RFID are not the only driver for this technology, we believe it is the starting point. When retailers or manufacturers increased profits outweigh the variable and fixed costs associated with implementation of RFID, adoption will occur throughout the industry. Diffusion of Innovation – Pallet Level To estimate the implementation timeline of RFID on a unit level, we firstly created a diffusion of innovation graph for the implementation of RFID at the pallet level:

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TODAY

GOING FORWARD


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RFID ADOPTION - PALLET LEVEL

$0.45

$0.23

$0.11$0.06

$0.03 $0.01 $0.01 $0.01 $0.01 $0.01 $0.010.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Timeline

Sup

ply

Chai

n Ut

iliza

tion

RFID PALLETAVERAGE TAG COST

Wal-Mart mandate: All suppliers become RFID compliant on pallet and case level, tag prices drop due to economies of scale.

Increase in supply-chain utilization due due 2nd tier

suppliers entry into RFID pallet and case level rollouts.

By 2011, pallet and case-level RFID is w idespread. Tag cost has dropped to 1

cent because many manufacturing f irms have already implemented on a

unit-level.

The graph illustrates an inverse relationship between individual tag cots and goods shipped with RFID (at the pallet level). In today’s environment middleware issues and tag costs are the major barriers stalling overall implementation. Undoubtedly, the 2006 Wal-Mart mandate is helping to reduce average tag costs, and if Wal-Mart publicizes its cost savings from RFID adoption, this will help to encourage other retailers and manufacturers to follow suit. We foresee manufacturers becoming the driving force of RFID throughout 2006 to 2009 as they realize economies of scale, and supply chain savings. This timeframe illustrates a change in the driving forces of RFID. By the time tag costs hit the one-cent mark, middleware solutions will exist to support effective implementation of RFID. The existence of affordable middleware will stimulate further adoption for all manufactured goods. Diffusion of Innovation – Unit Level Early adoption of RFID at the unit level tagging will depend on industry profit margins. The greater the profit margin on each item, the more likely that the company will be willing and able to pay for RFID integration. Therefore, our diffusion of innovation graph for RFID at the unit level is segmented by the industry. We believe there will be different groups of early and late adopters of this technology:


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RFID ADOPTION - UNIT LEVEL

$0.45

$0.11

$0.06$0.03 $0.01 $0.01 $0.01 $0.01 $0.01 $0.01

$0.23

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Timeline

Supp

ly C

hain

Util

izat

ion

RFID UNITAVERAGE TAG COST

Tag prices drop signif icantly due to Wal -Mart's 2006 mandate for

pallet/case tags. At this point, 1st tier manufacturers of high margin

items such as pharmaceutical companies and big screen

Spike in RFID unit-level implementation due to tags breaking 5 cent

barrier- 2nd tier suppliers enter the

mix.Another spike due to 3rd tier suppliers implementing RFID, once tag costs reach 1 cent.

Gradual increase thereafter due to technological advances and

Moore's law

At present, tag costs are prohibitive for many industries, but with the economies of scale associated with mass production of the tags (which could happen in the next four years) costs will drop. As the graph depicts, tag costs will likely reach the 5-cent mark around 2008. We have identified 3 to 5 cents as a threshold for many industries to begin to implement RFID on a unit level. Tag costs should reach 3 cents during 2009, and at this point, many manufacturing firms should be implementing pilot programs to test the effectiveness and supply chain efficiency brought about by unit level RFID technology. In addition, most of these firms will have already implemented RFID on a pallet and case level, thus they will have gained experience with the technology, and will be ready for an efficient deployment at the unit-level. A majority of the fixed costs, which involve readers, middleware and systems integration, will already be secured at this point in the implementation process. We have identified three tiers of the manufacturing industry--mostly separated by profit margin levels; the first tier will be the first to adopt RFID, the second tier will be second, and so forth. Tier one consists of the pharmaceutical industry (both over-the-counter and prescription) as well as high-end electronics manufacturers (plasma and LCD flat-panel TV’s). Examples of tier one firms would be Pfizer, Bayer and Sony. The average profit margin in the pharmaceutical industry is over 15%,xix while the profit margin on big-screen televisions is approximately 20-30%.xx Tier two consists of soda, and other bottled, canned or packaged beverages. In addition, tier two is composed of high margin consumer packaged goods such as cosmetics, razors and cigarettes. Examples of firms in these industries would be Coca-Cola, Pepsi, Procter & Gamble and Phillip Morris. The average profit margin on cosmetics is 10%,xxi beverages--almost 8%,xxii and tobacco products garner about an11% profit. xxiii


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Finally, tier three is difficult to define, and consists of the late-movers from an array of other industries--most notably packaged foods such as cereal and snack foods. Many tier three producers may very well decide not to implement RFID altogether, if they can afford not to avoid the technology and its associated costs. Examples of firms in tier three are General Mills, Jay’s Potato Chips and Hershey’s. We have determined that it would be difficult for producers to justify placing an RFID tag on every single box of cereal or bag of potato chips, due to shrinking margins and low degree of theft. Key Drivers Price: There are several key drivers that will play crucial roles in the early or late adoption of RFID on the unit level. The most important of the group is tag costs. Based on the research and manufacturer/retail attitudes and increasing concern with margins, cost is and will continue to be the main issue. Currently, RFID tags are far above five cents. Based on our research and analysis, when the tag price falls below five cents, a number of early adapters will adopt. Another surge will occur when the tags fall below three cents and yet another when the price drops to one cent or less. Middleware: Middleware issues are another important driver in RFID implementation. Currently, the number of middleware providers is limited and their experience with the technology is also limited. In other words the learning curve is steep and there has not been significant experience to draw from with regard to middleware. As suppliers gain more knowledge and have increased numbers of customers, costs will decline. With just a few customers and clients that are only interested in doing the absolute minimum to be compliant, costs on middleware will remain high. Early Successes or Failures: Perhaps the most important driver in the adoption timeline of RFID is the density of early successes or failures. Right now, all eyes are on Wal-Mart as the retail and manufacturing world wait to see whether or not the whole pallet level implementation scheme is a success or a failure. We will not see huge efforts to implement until companies have some sort of case study from Wal-Mart to examine. If Wal-Mart has any more stalls in its efforts to have suppliers conform, we will likely see stalls in overall RFID adoption. Because Wal-Mart if the 500 pound gorilla, and because they are the first ones to explore this uncharted territory, all eyes are on them. If Wal-Mart proves to be successful in its endeavors, more companies will follow and RFID implementation on the unit level will happen more quickly. Consumer Acceptance or Lack Thereof: Consumer acceptance levels should not be underestimated. There is currently a small groundswell of consumer activist groups lobbying for legislation restricting RFID capabilities. Currently, consumers know little if anything about RFID. They are beginning to hear the initials and vague descriptions of what it entails. Companies need to start public education campaigns aimed at alleviating consumer fears. If consumers receive their only information


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regarding RFID from anti-RFID consumer groups, they will launch a full, scale campaign to ban RFID altogether. However, if companies as a whole are honest and forthcoming about their intentions and the consumer benefits associated with RFID, implementation will occur much more quickly and with higher levels of consumer anticipation and perhaps even excitement. Conclusion Based on the model of paralleling RFID adoption to that of the original UPC systems we could not anticipate the adoption of RFID technology to be widely adopted at the unit-level within the next seven to ten years. Inadequate software solutions and high average tag costs would be the main issues slowing widespread adoption of RFID technology. But since adoption of this technology provides significant cost savings across the supply chain, has the potential to speed up the shopping experience, and ultimately provides retailers with more information with which to develop targeted marketing programs we believe RFID will evolve much sooner. The benefit of a faster shopping experience, in addition to the advanced marketing opportunities, requires the implementation of RFID chips at the unit level. Ultimately, it is supply chain savings that has bolstered the initial RFID movement. The accelerated adoption of RFID technology at the unit level depends on individual industry profit margins. It is the acknowledgement that even the monitoring and reduction of stock-outs will more than offset the capital requirements of systems at warehouse and retail that will drive and catalyze adoption 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. In terms of key drivers, RFID installation is jointly affected by tag costs, middleware solutions, early successes and consumer acceptance levels. Each of these areas can be considered independently, but the most critical factor is the reduction of tag costs. 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. USA Strategies is working with several of the Metro Future Store Initiative partners and see new technologies beyond current semiconductor manufacturing that will drive down the unit price and well as present application systems. New polymer chemistry and laser/ink-jet doping systems will not only lower the cost but the speed of application at the unit level.


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Unit Level Adoption

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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. It is in the next five to seven years that 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 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 consumer to have in-home monitoring of stock and stock-outs in their own refrigerator/freezer/pantry is totally realistic. The ability of the home system to talk to the retail store for reordering is already being studied by some major retailers.


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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 become time deprived and their eating and cooking habits evolve to address this issue, in-home use of RFID enabled consumables and appliances will become as commonplace as the home computer. Another significant change will be in the area of 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 is going to affect present models of communicating with the consumer. The power and effectiveness of presenting messaging to the consumer will now fall to the retailer which will give them more economical muscle with the consumer packaged goods manufacturer. This topic is significant and will be the subject of our next study on the continuing effect RFID technology will have on the retail landscape. i Mark Roberti. “Retailers Say RFID will Take Time,” RFID Journal. January 13, 2005 http://www.rfidjournal.com/article/articleview/1344/1/1/, ii Chappell, Gavin, Durdan, David, Gilbert Greg, Ginsburg, Lyle, Smith, Jeff and Tobolski, Joseph, 2003. “Auto-ID in the Box: The Value of Auto-ID Technology in Retail Stores,” Accenture and Auto-ID Centre MIT, February 1, 2003. iii Corsten, Daniel and Gruen, Thomas, 2004. “Stock-Outs mean Walkouts,” Harvard Business Review. May 2004, volume 82, issue 5. iv Convert, James, 2004. “Business Solutions; Down, but far from out: RFID technology is off to a disappointing start; but retailers are convinced its future is as bright as ever,” Wall Street Journal. January 12, 2004, page R5. v Chappell, Gavin, Durdan, David, Gilbert Greg, Ginsburg, Lyle, Smith, Jeff and Tobolski, Joseph, 2003. “Auto-ID in the Box: The Value of Auto-ID Technology in Retail Stores,” Accenture and Auto-ID Centre MIT, February 1, 2003. vi “2000 Retail Survey Report”, University of Florida, 2000. vii Chappell, Gavin, Durdan, David, Gilbert Greg, Ginsburg, Lyle, Smith, Jeff and Tobolski, Joseph, 2003. “Auto-ID in the Box: The Value of Auto-ID Technology in Retail Stores,” Accenture and Auto-ID Centre MIT, February 1, 2003. viii “2000 Retail Survey Report”, University of Florida, 2000. ix Convert, James, 2004. “Business Solutions; Down, but far from out: RFID technology is off to a disappointing start; but retailers are convinced its future is as bright as ever,” Wall Street Journal. January 12, 2004, page R5. x Corsten, Daniel and Gruen, Thomas, 2004. “Stock-Outs mean Walkouts,” Harvard Business Review. May 2004, volume 82, issue 5. xi Liard, Michael, 2004. “White Paper: Radio Frequency Identification (RFID) Middleware Solutions: Global Market Opportunity,” Venture Development Corporation. xii The Boston Consulting Group, 2003. “Customer Acceptance of FSI Applications,” Metro AG Press Release, October 2003. xiii “RFID and Consumers: Understanding Their Mindset,” A U.S. Study examining consumer awareness and perceptions of Radio Frequency Identification Technology, prepared for the National Retail Federation by Cap Gemini. xiv Claburn, Thomas, “Watching Out—The closer RFID gets to Consumers, the Hotter Privacy Issues Become.” InformationWeek, Page 39, February 16, 2004.


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xiv“The future is here: a beginners guide to RFID.” RFID Gazette. June 2004. http://www.rfidgazette.org/2004/06/rfid_101.html. xv Bishop, Trisha. “UPC bar code has been in use 30 years, once controversial technology is now ubiquitous.” The Baltimore Sun. Monday, July 5, 2004. xvi Thompson, Nsenga Byrd. “The big showdown.” Paper, Film & Foil Converter. August 1, 2003. xvii Pisello, Tom. “Does RFID equal ROI?” WebPro News. June 10, 2004. http://www.webpronews.com/it/itmanagement/wpn-18-20040610.html. xviii John Johnson. Telephone interview. January 19, 2005. xx “The history of barcodes.” BASICS: Barcoded (assets, sales inventory) control systems. http:/www.basics.ie. xxi “Drugs Industry Profits Aren’t Excessive.” July 11 2002. National Center For Policy Analysis. http://www.ncpa.org/iss/hea/2002/pd071102f.html. xxii“IW 1000's Top-Line Tango.” January 1 2004. Industry Week http://www.industryweek.com/CurrentArticles/asp/articles.asp?ArticleID=1618. xxiii Harbert, Tam. “Merry Christmas From Dell”. Electronic Business (December 2003): page 15.

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