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Economic and Strategic Considerations for RFID in Retail

RFID has the potential to transform the economic relationships in the retail industry in a number of ways.  These changes can affect both th... thumbnail 1 summary
RFID has the potential to transform the economic relationships in the retail industry in a number of ways.  These changes can affect both the in-store customer experience as well as efficiencies in the supply chain.

Pricing is the first major strategic issue that RFID has the ability to impact.  On the customer side, real-time access to inventory and customer data will enable retailers to more effectively differentiate their customers' willingness to pay.  RFID-enabled “smart shelves,” like the ones at Mitsukoshi described above, could keep track of how many pairs of jeans are left on the shelf and update the price on their digital displays to better match the demand.  If the jeans become popular one day, or even one hour – say lunchtime – the retailer can extract the right amount of surplus value from those trendy shoppers without human intervention or forecasting.

RFID can also improve the effectiveness of retail loyalty programs.  Now, many customers carry cards that they can swipe at checkout to receive discounts.  RFID-enabled keychain fobs, like those sent to some gasoline customers, can allow customers to activate special coupon displays, to collect points towards prizes, or to enter sweepstakes giveaways just by walking around a store.[1]  The additional information retailers can collect can help them better evaluate their marketing and pricing strategies, while rewarding loyalty and offering discounts to value-oriented shoppers.

Inventory Management is another area that will be transformed by RFID.  In fact, inventory management and supply chain optimization are currently receiving the most attention in the RFID world.  As mentioned above, Wal-Mart, in particular, has been aggressively leveraging the technology in its stores and distribution centers.  The goal is to keep store inventory more closely in line with demand by tracking merchandise stocks and sales more efficiently.  In addition, they expect to utilize the item-level tracking capabilities of RFID to more closely monitor perishable items like fruit or milk.  By ensuring that stores receive ripe fruit and fresh milk, the retailer will be able to discount or discard spoiling items,[2] and will be able to effectively balance supply and demand of these perishable items, as well as be better able to control the quality of product that is being sold to the customer. 

Of course, implementing RFID in a supply chain requires the cooperation of suppliers.  Network Effects come into play here, since the value of adopting the technology to any supplier (or retailer) increases as there are more retailers (or suppliers) that can take advantage of that investment in those RFID-tagged items (or that RFID-reader infrastructure), thus, the value of RFID in one component of the value chain increases based on the availability of the technology in other parts of the value chain.  Partly due to high costs and uncertainty in this still immature market, the network effect has yet to whip RFID adoption into high gear.[3] 

In fact, Wal-Mart’s plan to leverage RFID for inventory management has met significant resistance from its suppliers.  Many don't see enough value in outfitting manufacturing plants with the necessary equipment just to continue supplying Wal-Mart at the same prices.  There seems to be a chicken-and-egg problem of needing wide adoption by one side (retailers or suppliers) before the expense is worthwhile for the other, i.e., a problem of hold-up.  Because of this, it may take a stand-alone killer application to overcome the impasse and really spur large-scale adoption of RFID in the supply chain.

Standards and lock-in are also important issues, since leveraging the technology for supply chain efficiencies requires tight integration with back-office information systems. Without standards-based chips, readers, and software, RFID has the potential to lock retailers into a technology provider. Retailers might even wind up locked into suppliers. If alternative suppliers already use RFID chips that a retailer can't read, for example, that new supplier won't be able to integrate into the retailer's supply chain management solution without significant expense. While small retailers and suppliers would want open standards to lower their costs and improve their access to the technology and RFID enabled applications, large technology providers have an interest in differentiating their whole-solution products (chips, readers, and software applications). At the same time, retailers such as Wal-Mart and large suppliers like Proctor and Gamble have an interest in locking their partners into proprietary interfaces to increase their control over future negotiations.

In light of Wal-Mart’s failure to galvanize adoption through leadership, another way to solve these coordination problems space is through industry cooperation.  A retailer, supplier, and technology vendor coalition might cooperate to develop and freely share a set of standards about RFID in retail.  This guaranteed interoperability would take some of risk out of adopting the technology and help the industry over the adoption hurdles to generating significant network effects.  It was precisely this type of industry cooperation that led to the standards and network effect-driven adoption of bar codes in the 1970s.[4]

[1], “Miller Oil debuts RFID loyalty program,” 2006;
[2] Songini, M. “Wal-Mart details its FRID journey,” Computerworld, 2006.,10801,109132,00.html
[3] Faber, P. “RFID Strategy – RFID and the 'Network Effect',” Industry Week, 2006.
[4]              Varchaver, N. “Scanning the Globe.” Fortune. 2004.