RFID Faces Adoption Challenges in Retail In-store Environments

Spending on RFID systems for retail POS forecast at nearly $400 million by 2010, but technical, supply chain and cultural issues abound, VDC reports

April 17, 2006

Spending on RFID systems for retail POS forecast at nearly $400 million by 2010, but technical, supply chain and cultural issues abound, VDC reports

Natick, MA April 17, 2006 Spending on radio frequency identification (RFID) technologies in the retail sector is set to increase significantly in the next four years, but RFID adoption faces significant challenges in the in-store environment, according to a recent report from Venture Development Corporation (VDC).

RFID systems spending for retail in-store applications reached nearly $88 million globally in 2005, and VDC forecasts growth of more than 35 percent per year in retailer spending on RFID for in-store point-of-sale (POS) applications through 2010, when the market is expected to reach nearly $400 million.

Global Shipments of RFID Systems for the Retail POS Vertical Segmented by Product Category (Millions of Dollars)

2005
Hardware: $58.3
Software: $7.9
Services: $21.8

2010
Hardware: $241.5
Software: $31.8
Services: $122.1

Big retailer interest in and commitments to RFID have been well documented. Their technical approaches and application priorities are widely divergent, but their goals are fairly consistent. VDC telephone surveys of retailers conducted during the first quarter of 2006 reveal a common vision for RFID retail POS applications that includes the following:

Accurate and efficient inventory control;

Consequent cost reductions related to better inventory management;

Optimal stock levels based on real-time customer activity/demand;
Reduction of out-of-stocks;
Lower warehousing costs via automated processes and improved tracking efficiencies;

Improved margins associated with the cost reductions cited above.

The key to RFID for retail in-store applications is the cost-effectiveness, reliability and ease-of-use of item-level tagging solutions. Without item-level tagging, VDC believes that most value propositions, revenue enhancement goals and margin improvement objectives will not be attainable.

Some of the most significant challenges to item-level solution development, deployment and operation include:

Software coding and proper systems integration: Conversion code needs to be written to convert all existing databases so that a retailer can cart EPC information. Managing the enormous volumes of data generated by RFID systems is expected to be a complex task, requiring significant retailer attention;

Unsynchronized adoption across the supply chain: Retailers are concerned that their IT suppliers and distributors may not be quick to implement RFID. Retailers and manufacturers need to collaborate on RFID efforts to receive the full benefit, including determining how best to place/position RFID transponders onto products or into packages in the most cost-effective and efficient way;

Extensive training requirements of new systems: Retail personnel must be trained on how to use the new systems and to learn new job functions. In addition, some retailers may need to renegotiate labor contracts due to collective bargaining agreements regarding work rules for employees; and;

Cost of technology replacement: In addition to the costs of system components and business process changes, there is also the potential expense of replacing existing scanners in stores with new devices that are both bar code magnetic stripe and RFID enabled. With retailers supporting more and more checkout lanes across hundreds of stores, the number of devices that will potentially be replaced/upgraded is significant.

According Michael J. Liard, director of VDC's RFID Annual Research Service: "Item-level tagging will be rolled out slowly, over time. Deployment decisions will be determined as much by the value (or liability) of items merchandised as by the volume of units sold. Current implementation costs, particularly tag prices, are simply too high for widespread adoption."

Further information on VDC's research around RFID and its 2005-2006 RFID Business Planning Service is available at http://www.vdc-corp.com/autoid/annual/05/br05-21.html.

Additional Articles of Interest

Contemplating RFID? Here are three critical questions to answer before embarking on a radio frequency identification initiative. Read "Recognizing Real RFID Adoption Potential," in the February/March 2006 issue of Supply & Demand Chain Executive.

A recent independent study revealed that Wal-Mart customers are finding the items they wanted in stock more often due to the retailer's use of RFID technologies when compared to control stores. Read more in "Wal-Mart Achieving Improved On-shelf Availability with RFID, Study Finds" on SDCExec.com.