An old technology is solving the vexing problem of inventory management in omnichannel environments: radio frequency identification. The result is big market growth for RFID and a big ROI for the retailers implementing it.
This isn't news to those who have worked closely with RFID. But others remember the IBM commercial in 2006 (below) that portrayed a shady character walking through a supermarket stuffing items into his coat, only to be accosted by a security guard at the exit, who said, "Forgot your receipt. Have a nice day."
The use of RFID for auto-checkout never happened, but longtime observers get déjà vu as they discover that RFID's following has been building steadily to a "tipping point" in 2015. This time, the technology is becoming a key part of integrating retailers' online and mobile presence with their physical locations. RFID even relates to the Internet of Things in stores, showing that it may take time for technologies to find their applications, even those heralded as "the next big thing."
To put it simply, "RFID allows the retailer to know where their stuff is," said Steve Halliday, president of RAIN RFID Alliance.
Old tolerances for inventory variations between stores and systems need to be upgraded from 65 percent exact match inventory accuracy to near 100 percent, said Justin Patton, RFID lab director at Auburn University. For example, it's not acceptable to have a customer order a TV from a retailer's website, go to a store to pick it up and find it's not in stock.
"The stores absolutely must have a strong handle on their inventory accuracy if they want to avoid disappointing their customers," Patton said. "The only technology available to move the needle upwards is RFID, and it has been a strong attraction."
RFID got its first patents in the 1970s, and IBM worked with Walmart (NYSE:WMT) on retail pilots focused on improving inventory tracking and replenishment in the 1990s, according to the "Kurt Salmon RFID in Retail Study" published early this year.
In 2003, Walmart required its top 100 suppliers to attach RFID tags to pallets and cases sent to distribution centers, and expanded the program in 2006. The program was gradually deemphasized and RFID went into something of an eclipse with the recession of 2008.
But the technology came back with item-level tagging and the growth of buy online, fulfill at store programs. The global RFID label market is expected to grow from $2.2 billion in 2014 to $4.9 billion by 2019, a compound annual growth rate of 17 percent, MicroMarket Monitor reported this month. Another researcher, Frost & Sullivan, said the market for middleware, hardware and tags earned revenues of $737.8 million in 2014, and is estimated to grow to $5.4 billion in 2020.
Macy's at the forefront of adopting RFID
"RFID is vital to keeping more accurate item-level count of our inventories, which in turn key in to our omnichannel business strategies," said Jim Sluzewski, senior VP of corporate communications and external affairs. "If we expect to be able to fulfill customer demand—whether it's coming from stores, online or mobile—with all our inventory resources, we need to have accurate counts."
Macy's has identified the ability of RFID to significantly improve sales, gross margins and markdowns by leveraging improved inventory counts that are in real time and accurate. The retailer plans an additional rollout of RFID tagging in fashion categories in 2015.
Target also plans to introduce RFID later this year in one of the biggest RFID projects yet undertaken in retail.
The retailer is working with vendors to speed up the timeline to begin inserting RFID "smart labels" on price tags to improve inventory accuracy and enhance Target's in-stock position, said Keri Jones, exec-VP of global supply chain and operations.
Other chains that have either already implemented RFID-based systems or are rolling them out include Kohl's, Saks, Borsheims, Lord & Taylor and American Apparel. "They are all using IoT systems. RFID is the inexpensive, simple way to connect those things into the Internet," Halliday said.
Softlines lead the way toward full adoption
The Kurt Salmon study reported that 32 percent of softlines retailers have "full adoption" of RFID, 24 percent are either piloting RFID or plan to, while 44 percent have no plans to use RFID.
The results of the 2014 GS1 US Standards Usage Survey confirmed RFID is gaining traction, said Melanie Nuce, VP of apparel and general merchandise, GS1 US. The survey found that more than half (57 percent) of retailers surveyed are currently implementing RFID, and another 19.3 percent planned to implement RFID within the next 12 months. Of manufacturers, nearly half (48.2 percent) said they are now implementing RFID, and an additional 21.1 percent plan to implement RFID within the next 12 months.
"RFID is viewed as being foundational to omnichannel success, which is what has helped it reach critical mass over the past eighteen months," Nuce said. "Several of the top tier U.S. retailers are publicizing their RFID roll-out strategies and advocating the many business benefits of deploying item-level RFID."
Direct return on investment can typically be achieved in less than two years, she said. For instance, implementing a display compliance project can bring ROI to an organization within one calendar year.
"Indirect ROI is delivered in the form of better quality data and reduced handling errors, improved labor productivity and faster inventory counting via automated process, as well as higher level of customer satisfaction by assuring the right goods are sent where they should be—which is gained essentially immediately upon deployment," Nuce said.
The early work that was done in UHF RFID was focused on pallets and boxes, and the hope of success was not realized, Halliday said. The technology was still fairly new and there were some issues.
"Today the focus is on item management. The technology has made some dramatic improvements, tags are more sensitive, readers are better and the concept of reading items is now a workable thing. The retailers see the idea of knowing more about their stock as a big step up in intelligence so naturally they are keen to implement," Halliday said
This growing interest in item-level tagging is expected to drive demand for tags in the retail industry, said Ram Ravi, electronics and security industry analyst with Frost & Sullivan. "Applications such as inventory management, loss prevention, and customer behavior understanding are expected to augur well for the growth of RFID. Apparel constitutes the major share of the total RFID market in retail. Other growth areas include footwear, perishables, jewelry and personal care."
Virtually all chain-wide rollouts of item level RFID to date have been with specialty apparel retailers and department stores, said Marshall Kay, a retail management consultant with RFID Sherpas. One exception he noted is a French sporting goods retailer, Decathlon.
"The fact that RFID has yet to be utilized in any meaningful way by bookstore chains, DIY retailers, drugstore chains and grocers makes it easy to dismiss RFID as a fringe technology. But RFID can add value in those types of environments too, and a technology does not need to have an identical value proposition across all retail segments in order to be real or significant," Kay said.
Pointing to the future, he said the degree of usage by specialty apparel and footwear retailers is far less than it could be. "I predict a huge uptick in this segment of the market."
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