RFID in 2006: A Story of Extremes
By Raghu Das
As we enter 2007, many RFID suppliers are licking their wounds, while for others, RFID business is booming. As IDTechEx interviews solution providers and users across the RFID industry for the new report “RFID Forecasts, Players & Opportunities 2007-2017” to be released in January (http://www.idtechex.com), Raghu Das, CEO, summarizes some of the findings.
The volumes that never came
At the beginning of 2006, there was much optimism in the retail mandate sector. RFID tag production capacities had been put in place and Gen 2 was delivering superior performance than previous versions. However, arguably the pallet/case market for RFID tags became the nearest thing to a black hole in the RFID universe in 2006, thanks to reluctant mandated customers, technical problems and pricing for volumes that never came despite retailers reporting excellent paybacks.
Speaking to many consumer goods manufacturers IDTechEx has found considerable foot dragging resulting in pallet/case tag purchases being as little as 250-300 million tags in 2006 at the heavily loss making price of around 10 to 15 cents each. Readers are also being sold at a heavy loss. Some participants have seen benefits. Procter and Gamble found that tagging display cases for Wal-Mart with shared information led to a sales increase 19 percent of Fusion blades caused by more timely arrival at shelf. Hanna Candle Company found 90 pallets worth $12.6 million went missing but were found with the RFID reducing a knock on effect for ordering. However, these benefits are not necessarily paybacks and companies are not saying they are sustainable.
These sums of money are among the smallest of any RFID sector, less than esoteric niches like one company tagging random samples of mail to assess performance or one company earns from tagging cows. The point is that the mail tags are ten dollars or more and the cow tags are two dollars. Both of those companies have around $50 million of probably profitable sales. One could go on and on with examples like this.
RFID hardware suppliers that had prioritized the retail sector started to look elsewhere though none left the sector altogether because they know there will be a winner one day and most have strong backing. They are playing “Last man standing.” There is oversupply, although some system integrators make money.
Basically, the RFID tagging of pallets and cases for major Western retailers of under 400 million pallets and cases over two years has already improved their margins by up to $100 million. This was provided at a loss of about $100 million by the consumer goods companies that supply them. In addition, the RFID suppliers to these consumer goods companies also lost about $100 million in the exercise. In the case of the RFID suppliers, that money came from investors and parent companies. It was certainly not predicted that those investments in RFID companies would, in effect, flow rapidly to the large retailers. System integrators are faring better, with some even claiming to make money installing pallet/case RFID infrastructure at CPG companies and retailers. At least with anti-theft tags earlier mandated by retailers, the tag and system suppliers to the mandated CPG companies—notably Sensormatic (now in Tyco-ADT) and Checkpoint Systems—stayed profitable because they did not price for volumes that never came. However, anti-theft tags did and still do cost the CPG companies heavily for no return and pallet/case RFID is history repeating itself.
Although IDTechEx forecast that eventually retail will be the biggest market by far for RFID, consumer goods companies are yet to see sustainable paybacks. The real opportunity for them is with item level tagging. Retail mandates asked for their top suppliers to tag the pallets and cases of the highest volume products they sell. The highest volume products tend to be those which are lower value and lower margin and therefore it comes as no surprise that most consumer goods suppliers don’t get a payback. For RFID suppliers, item level tagging for retailers is a better business where high value products are tagged first, such as Marks & Spencer apparel, BGN books or Best Buy video games. However, it is vulnerable to rapid design change. Like anti-theft tags, there are three incompatible options here—Near Field UHF, Far Field UHF and HF.