Item-Level RFID: Critical Mass at Last?

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1 THOUGHT LEADERSHIP SERIES RIS Thought Leadership Series Item-Level RFID: Critical Mass at Last? Item-level RFID technology has had its share of false starts and setbacks in the retail industry, but the current embrace has undeniable momentum, powered by solid test results and business use cases, deployments by major retailers and the promise of significantly lower per-tag prices. While the bulk of activity so far has been in the apparel and footwear verticals, item-level RFID tagging is poised to expand into other categories, including consumer electronics, jewelry, and packaged goods such as cosmetics, health care and batteries. A key factor in the technology s resurgence is that the vastly improved inventory visibility the technology delivers is also a crucial requirement for operating in today s omni-channel, increasingly mobile retail environment, facilitating both buy online/pick up in store and storebased fulfillment of digital commerce orders. This convergence means that item-level RFID could be near its retail tipping point at last. INSIDE: 3 Quantified Business Benefits 4 Mobile Readers Impact 5 Per-Tag Price Reductions 6 RFID Feeds Inventory Intelligence Sponsored by

2 RIS THOUGHT LEADERSHIP SERIES What s at Stake for Retailers Radio frequency identification (RFID) technology has had its share of false starts and setbacks in the retail industry. But the current embrace of item-level RFID has undeniable momentum, powered by solid test results and business use cases, deployments by major retailers (including Macy s, JCPenney, Walmart, Dillard s and American Apparel) and the promise of significantly lower per-tag prices. While the bulk of activity has been in the apparel and footwear verticals, item-level RFID tagging is poised to expand into other categories, including consumer electronics, jewelry, and packaged goods such as cosmetics, health care and batteries. Many of the technical issues with tags that had stymied earlier deployment efforts, including read interference from metal and liquids, have been addressed with advances in tag and reader technology. In addition, the use of mobile RFID readers in recent years has provided added flexibility. Retailers can now begin their deployments in a single department, measuring benefits there before investing in fixed readers that need to be installed in strategic locations throughout their stores. Importance of Inventory Visibility: Item-level RFID s key benefit aligns with a critical need in today s omni-channel, increasingly mobile retail environment knowing what items are where at any given time. One of the biggest factors in the technology s resurgence has been that a key item-level RFID benefit vastly improved inventory visibility is also a crucial requirement for operating in today s omni-channel retail environment. Omni-channel and mobility initiatives have pushed RFID up the priority list, says Marshall Kay, principal at consulting firm RFID Sherpas. With the increased focus on mobility their own and their customers it s more important than ever for retailers to be operating their business with accurate information. Cross-channel functions such as buy online/pick up in store or mobile apps offering shoppers real-time information on inventory levels have raised the stakes for retailers. You can t drive customers into your store to purchase an item if you don t have 100% confidence that the item is there, says RFID Sherpas principal John-Pierre Kamel. Customers will lose faith in your branding and your messaging. Facilitating Store Fulfillment: By speeding the process of finding items within the four walls of a store, item-level RFID helps retailers speed store-based fulfillment of digital commerce orders. Without the highly accurate inventory visibility that item-level RFID facilitates, retailers options include creating inventory buffers within their systems, a.k.a. safety stock, or conducting more frequent cycle counts in stores. Both are expensive propositions in terms of increased inventory carrying costs and higher labor costs, respectively. In contrast, item-level RFID provides seamless inventory visibility as well as driving value in stores and other channels. For example, because item-level RFID identifies not only which items are within the store s four walls at any given time but also helps pinpoint their current location, associates can find the individual item they are seeking more quickly. This has become an important benefit as more retailers seek to fulfill digital orders from their store inventories. Of course, these and other benefits depend on tagging programs that encompass all relevant items in a department or retail store. The reason that so many business use cases have been established in apparel and footwear is because the products themselves provide minimal read interference and also because of the prevalence of vertically integrated, closed-loop manufacturing in these areas. These existing business and technology structures have simplified the source tagging processes that are at the heart of item-level RFID s success. As the technology spreads into other verticals and product categories, the participation and coordination of suppliers, tag makers and technology vendors will be critical. RIS Thought Leadership Series I February 2012 I 2

3 RIS THOUGHT LEADERSHIP SERIES Lower Stockouts, Higher Sales Even for retailers operating primarily in the brick-and-mortar channel, the use of item-level RFID tags that can be read by both fixed and mobile devices offers significant benefits. When you improve your inventory accuracy at retail it then helps to substantially reduce the amount of stockouts, leading to sales increases of between four to six percent, says Joe Andraski, president and CEO of VICS (Voluntary Interindustry Commerce Solutions). Higher in-stocks have a positive effect on both current and future sales: There s been so much work done showing the impact of dissatisfied consumers leaving the store and not returning the industry has seen it time and time again, Andraski explains. The VICS Item Level RFID Initiative (VILRI), a group that includes retailers, suppliers, industry associations, academics and solution providers dedicated to quantifying the technology s benefits, worked with the University of Arkansas to conduct a series of one-brand-to-one-retailer item-level RFID pilot tests. Both the academic tests and subsequent real-world deployments have identified the technology s range of benefits. (See Business Benefits table.) With item-level RFID, you know what you have and where it is, Andraski notes. This allows you to react to what s actually taking place in retail, versus relying on forecasting and the triple exponential smoothing that has taken place in the past. This doesn t mean that forecasting goes away; however, within a shorter time frame, [item-level RFID] is where you get your information, and you can react intelligently to what s being sold and also accommodate the consumer much better. Key benefits that were revealed in the pilot tests included: Merchandise allocation improvements: Retailers used the more accurate information about sales and product movement to move merchandise from one store to another, or to redirect merchandise before it reached a store, based on consumer desire. Store associate productivity improvements: Faster, more efficient cycle counts and the ability to more quickly find products allows associates to spend more time on the sales floor interacting with customers. Supplier efficiency improvements: We knew from some of the pilot programs that among suppliers, the technology helped them manage their own business more effectively, says Andraski. The accuracy of product showing up at a re - tailer s distribution center exceeded what had been seen in the past, so chargebacks, which no one likes to talk about, were substantially reduced. It s about getting the right product at the right place at the right time. Price Elasticity by Product Characteristic BENEFIT PERCENTAGE Reduction in out-of-stocks by 60% to 80% Better inventory accuracy Between 98% and 99.9% Reduction in cycle count time by 75% to 92% Reduced inventory carrying costs by 30% to 59% Reduced receiving time by up to 91% Improved conversion rate by up to 92% Increased units/transaction and $/transaction by 19% and 6% Increased sales from 4% to 21% Source: ABI Research RIS Thought Leadership Series I February 2012 I 3

4 INDUSTRY INSIGHT Mobile Readers Enhance RFID s Retail Value Suresh Palliparambil, Director Business Development, Tags & Labels Identification Line, NXP Semiconductors Q: What are some of the reasons behind the resurgence of retailer interest in item-level RFID? SURESH PALLIPARAMBIL: Over the years, people have tried to discover where the real business case benefits of RFID were. At first the focus was on pallet-level and case-level solutions, but when people started studying tagging of individual items, they began to see the operational efficiency benefits in terms of reducing out-of-stocks, improving inventory levels and being able to check inventories more often. Knowing your inventory levels and therefore knowing what to order, knowing what you have in the back of the store versus what s on the floor these are basic, day-to-day fundamentals of running a retail business, and RFID s ability to provide that visibility in a reduced time frame is enough to justify it. Retailers can use the same devices they re already using to collect data about apparel and footwear items in other departments, such as cosmetics or jewelry. This gives retailers a tremendous amount of flexibility. Suresh Palliparambil, Director Business Development, Tags & Labels Identification Line, NXP Semiconductors Q: Are there other ways that today s RFID solutions are becoming more retail-friendly? PALLIPARAMBIL: The fact that most solutions are being designed with mobile handheld readers is playing a big part. Previously, when considering item-level tagging for product lines like jewelry, people thought you needed to maintain fixed shelf-level readers that would be capable of providing hourly or on-demand inventory counts. But because most retailers are using handheld devices for data collection, they re finding that they don t have to hard-wire their store locations. This means that once you have the software in place and the product tags set up, all you need to do to enable the solution is provide the mobile readers to each store. In fact, retailers can use the same devices they re already using to collect data about apparel and footwear items in other departments, such as cosmetics or jewelry. This gives retailers a tremendous amount of flexibility, especially compared to having fixed readers or antennas in the store s ceilings. In that case, the retailer would have to make sure the tagged products are always placed in that area they couldn t change things around for seasonal or promotional reasons. Q: How have loss prevention capabilities advanced with today s RFID tags and solutions? PALLIPARAMBIL: We offer a tag that automatically alerts a retailer s security system when it s tampered with, and it s in use at the international retailer Gerry Weber. Say a shoplifter takes an undergarment such as a bra into a dressing room and rips out the tag, with the intent of wearing the item under their clothes. When the state of the tag changes, it can set off an alarm or prompt the system to send a text message. This helps prevent a very common form of shoplifting. Another development in tag technology is what we call 4R, Real Read Range Reduction. After a product has been sold, the tag s read range is brought down to a few inches so that it s only capable of being read by a near-field tag reader. This helps in terms of privacy concerns the idea that because a tag can be read, you or your purchases can be tracked after you leave the store without the necessity of having to kill or remove the tag. So if the customer wanted to return the item, the tag could still be read at close range and then re-used. This makes for faster returns and better customer service and also helps in loss prevention. RIS Thought Leadership Series I February 2012 I 4

5 RIS THOUGHT LEADERSHIP SERIES Addressing Out-of-Stocks: Item-level RFID s ability to improve in-stock positions can boost sales by 4% to as much as 21%. 0% 5% Tag Price Reductions % 4.5% 6.7% Gathering Momentum There s increasing evidence that RFID s success is moving closer to retail s mainstream. An October 2011 survey of 58 suppliers and 56 retailers in North America, conducted by Accenture on behalf of VILRI, confirmed that many executives across the retail supply chain are convinced that item-level RFID can improve efficiencies and boost sales, according to Item-Level RFID: A Competitive Differentiator, an Accenture report released in January The survey found that most major apparel and footwear retailers will adopt RFID technology in some part of their business within the next three to five years, if recent momentum continues. Andraski admits that this would represent an aggressive growth curve, but the message is that the CEO sees the value in this technology and sees why the retail organization needs to move forward with it. 10% 15% 20% 25% 30% 35% Annual decrease Cumulative Source: Accenture, % 26.7% 30% RFID tag costs have dropped by nearly one-third since 2008, with tags from major suppliers now available for as little as 10 cents per tag. 33.3% In addition, surveyed suppliers said the technology had not only delivered in expected areas inventory management, loss prevention and distribution management it had also provided benefits in unanticipated areas such as savings on transportation costs and deeper customer insights. Item-level tag costs, which have the potential to slow down RFID s upward trajectory, are falling and will continue to do so as the rate of adoption increases, according to Accenture. In fact, high tag costs may be more of a perception problem than an actual economic issue. Many people think fully converted tags still cost anywhere from cents each, high enough to make it seem like a specialty technology suitable only for luxury goods or products requiring extreme levels of security, write the Accenture report authors Mike Gorshe, Mary Rollman and Russ Beverly. The reality, however, is that tag prices have fallen dramatically in the last few years. Price tag costs have dropped by nearly a third since 2008, according to Avery Dennison, a major manufacturer. Today, tags from major manufacturers are available today for as little as 10 cents per tag, depending on requirements and tag type. (See chart.) Future Directions for Growth Item-level RFID has a number of potential growth paths in the next few years, and much of that growth will be led and directed by retailers, according to VILRI s Andraski. In addition to the retailers that have already gone public with their pilots and deployments, a substantial number have engaged and are learning about the technology but are choosing to stay under the radar for the present. He notes that a battery manufacturer is tagging its products for scanning at the retail level and is finding positive results: Instead of sending its trucks out based on what they thought was at the store, with what they thought was needed for replenishment, they RIS Thought Leadership Series I February 2012 I 5

6 INDUSTRY INSIGHT Item-Level RFID Key to Retailers Inventory Intelligence Gordon Adams, SVP Sales and Professional Services, Store Performance Solutions, and Jim Caudill, Senior Director, Global Retail Marketing, Tyco Retail Solutions Q: What are some of the reasons you re seeing for the renewed momentum of item-level RFID in retail? GORDON ADAMS: Most retailers understand that inventory accuracy and visibility are core problems they need to solve, and item-level RFID offers significant improvements in these areas. Once retailers have inventory accuracy and visibility, there are numerous opportunities to build on it, in areas like cross-selling and upselling, omni-channel fulfillment, and enhancing the customer experience. These are the kinds of things a retailer might be afraid to offer a consumer if they re not really confident about the accuracy of their inventory. In fact, what we re really talking about is inventory intelligence, meaning enhanced inventory visibility capabilities enabled by item-level RFID technology. Q: Given the rapidly changing nature of store technology, how does item-level RFID fit into the larger context of store performance? JIM CAUDILL: We are seeing more and more in-store solutions beginning to take advantage of the power of real-time sensor data. In addition to item-level RFID for inventory visibility, it can be combined with EAS sensors to analyze and better battle shrinkage. Traffic intelligence solutions are another example, where people-counting sensor data can be combined with employee schedules, POS, RFID and perhaps even video data to trigger the store manager to redeploy resources to higher-value customer service functions based on what s actually happening in the store. For the most part these are individual stovepipe solutions, and they each offer value to the retailer but in our view what really makes a difference is combining those elements together. The vision we have at Tyco is to use real-time data from our own sensors and solutions as well as third party sources of data to drive new insights and deliver a new level of high-value information that retailers can use to drive better store performance. Q: What are some examples of how this cross-pollination of data might work in the store? ADAMS: One way would be with people counters in a dressing room area to monitor traffic. If there s a lot of activity here, it might indicate a need for customer service attention. If that insight can be married to employee data about who is working at any given time, and that person is alerted, they can serve the customer more quickly. Another example is if you have item-level RFID and sensors indicate that a customer has taken five of the exact same item into a dressing room. The customer isn t trying on five identical items that s a likely theft in progress. In this case the individualized alert would go to a store security person. Once retailers have inventory accuracy and visibility, there are numerous opportunities to build on it, in areas like cross-selling and upselling, omni-channel fulfillment, and enhancing the customer experience. These are the kinds of things a retailer might be afraid to offer a consumer if they re not really confident about the accuracy of their inventory. Gordon Adams, SVP Sales and Professional Services, Store Performance Solutions, Tyco Retail Solutions Q: What do you see as the biggest potential roadblock to further adoption of item-level RFID? CAUDILL: For a retailer to benefit from more accurate inventory and be able to do more frequent cycle counts, they have to recognize that there can be some change management impact on the organization. For example, going from counting inventory once or twice a year to having a solution that can count 20,000 to 30,000 items in an hour is a significant change. And once they have access to this richer and more frequent data, what will they do with it? Certainly item-level RFID introduces many new value creation opportunities, but it also means existing processes will be impacted and new processes will be introduced. Examples include new or enhanced processes to support real-time shelf replenishment to minimize out of stocks, and new processes to handle, the retagging of items returned by customers. So we see retailers understanding of the change management impact key to capturing maximum value from these solutions. RIS Thought Leadership Series I February 2012 I 6

7 RIS THOUGHT LEADERSHIP SERIES Aggressive Growth Anticipated: A recent survey of apparel and footwear retailers indicates that virtually all will adopt RFID technology of some kind within 3-5 years. Look Ma, No Hands The four-walls benefits of item-level RFID will be magnified with next-generation technologies offering so-called hands-free RFID, according to RFID Sherpas Kay and Kamel. This technology includes placing reader antennas in ceilings and other locations throughout the retail store, providing an always-on, real-time view of exactly what s happening in the store that s not dependent on manual processes, i.e. an associate performing a cycle count using a mobile reader device. have definite information about what s been sold, says Andraski. In addition to inventory management improvements, the company has seen benefits in transportation (better truck routing and fewer miles traveled), labor costs and customer service. Andraski also sees the potential for expansion in the public participation with VILRI of high-profile department and mass merchandise stores such as Macy s and Walmart. As these retailers see successes in their apparel and footwear departments, they are likely to seek other departments and product categories that could benefit from RFID. Non-U.S. deployments have included products such as jewelry, eyeglasses, and additional apparel categories such as undergarments. In a department store we re talking about a total of 1.5 million to 2 million SKUs, says Andraski. Not all will be appropriate for RFID tagging, of course, so he predicts that the retail industry will be using barcodes plus RFID labels for a long period of time. There is also significant potential for growth in the increasingly global nature of supply chains and retailing in general. RFID tags ability to hold large amounts of data that can be read quickly and accurately could help move products more quickly through international customs, eliminating a significant supply chain bottleneck. Tagging also has the potential to cut down on product counterfeiting, which costs the industry between $800 million and $1 trillion annually. At the store level, item-level tags offer loss prevention benefits, addressing both employee and customer theft. Andraski reports that tag manufacturers are working on tags that combine RFID with EAS (Electronic Article Surveillance) technology at a substantially lower cost. The benefits include greater reliability of information, faster identification of items in need of restocking and improved protection against internal theft. For example, if the system tracks the movement of five identical items being carried into a dressing room area, this is likely to be a shoplifter gathering items to steal (honest customers generally don t try on five of the same identically sized item). Marshall and Kamel note that the technology supporting this type of hands-free RFID is still relatively immature in the store environment. While the preferred approach for hands-free RFID involves placing antennas overhead, most of today s passive RFID tags cannot be read perfectly from above. In addition, metal shelving may shield tags on items on lower shelves, making them harder to read. If these issues can be addressed, however, they believe that this will be the next major change in retail s use of RFID: We think a number of retailers will begin evaluating it in If so, the acceleration of store-level benefits from such technology will be felt in a number of other retailing and supply chain functions. As more benefits are seen, more items will be tagged and more retailers will adopt the technology, widening the circle still further. It s impossible to know the precise moment when the true tipping point for RFID will occur; the retail industry may be well on its way or could even have achieved it already. What does seem clear is that this time, the wind is at item-level RFID s back. Moving Beyond Apparel: Potential growth areas for item-level tagging include consumer electronics, jewelry, eyeglasses, and packaged goods such as batteries, cosmetics and fragrances. RIS Thought Leadership Series I February 2012 I 7

8 THOUGHT LEADERSHIP SERIES RIS Thought Leadership Series About NXP Semiconductors NXP Semiconductors N.V. (NASDAQ: NXPI) provides High Performance Mixed Signal and Standard Product solutions that leverage its leading RF, Analog, Power Management, Interface, Security and Digital Processing expertise. These innovations are used in a wide range of automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing applications. A global semiconductor company with operations in more than 25 countries, NXP posted revenue of $4.4 billion in Additional information can be found by visiting About Tyco Retail Solutions Tyco Retail Solutions, a unit of Tyco International, is a leading global provider of integrated retail performance and security solutions, deployed today at more than 80 percent of the world s top 200 retailers. Our Integrated Store Performance Platform combines our store performance and security solutions to capture, interpret, report and intelligently respond to real time operational data from stores, employees, inventory and shoppers to optimize retail operations. The powerful platform was designed to break down traditional retail operational silos and promote holistic decision making in the store. Customers range from single-store boutiques to global retail enterprises. Operating in more than 70 countries worldwide, Tyco Retail Solutions provides retailers with realtime visibility to their inventory and assets to improve operations, optimize profitability and create memorable shopper experiences. The Tyco Retail Solutions portfolio for retailers is sold through ADT and authorized business partners around the world. For more information, please visit