Level the RFID Adoption Playing Field and it will Benefit all Retailers
on Feb 18, 2015
RFID delivers benefits to retailers who can get their stock tagged. But getting this done cost-effectively is easier for some retailers than others. If industry groups can find ways to level the playing field it will help RFID get to the "tipping point" sooner, benefiting everyone.
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Over the last few months ChainLink has engaged in a detailed analysis of the return on investment of RFID in the apparel retail store environment. The simple, hand-held-based, inventory management use case is at the core of most successful retail RFID deployments to date. For retailers that meet some minimum requirements, this killer application is sufficiently beneficial to justify adoption. Our research suggests that retailers meeting these criteria can expect revenue uplift of between 5% and 15% and a corresponding increase in gross margin dollars that should have a measurable impact on corporate value.
To be fair, it’s not true for all retailers – the benefits require a minimum level of mix complexity,1 inventory turns, AUR2 and gross margin. And RFID delivers more value when there is more room for improvement. However most apparel retailers meet this last requirement: our research includes examples of pre-RFID inventory accuracy from 40% to 80%, which comports with academic studies that cite average accuracy between 50%3 and 70%.4
Mix complexity at www.Target.com This is one of 400 denim jeans styles, representing, perhaps, 4000 SKUs
Not all retailers are rushing to implement RFID. Retailers who do skew towards those with greater control over their source of supply. RFID favors private labels over national brands, vertical integration over horizontal, and big retail over small. Why? Because it’s less efficient for the manufacturer when a small subset of its output is tagged, and the manufacturer will not absorb that cost alone if they don’t have to.
For a national brand owner making basics, such as denim jeans or underwear, if only 20% of the volume requires tags, the tagged product is an exception case requiring special treatment.5 The added cost of that special handling will ultimately be shared by the retailer according to the relative negotiating leverage of the retailer and its suppliers.
This challenge confronts retail brand owner #46 (BO 4), depicted in the diagram below:
Retail marketplace showing how control of supply makes RFID easier
Example: Smaller band owners shoulder added cost while large retailers realize benefit
Retailer 7, a large department store chain that offers many national brands has the market power to require tagging. BO 4, with only one of its four customers requiring RFID, must treat Retailer 7’s RFID-tagged order differently, with necessarily higher handling costs. In the end, the incidence of the cost will be shared as if it were a tax, with a disproportionate part falling on the weaker partner.7 But of course, under this scenario, most of the benefits accrue to the retailer.
Example: Small retailers wait for brand owners to implement across-the-board RFID
Retailer 4, on the other hand, a small chain with relatively less market power, has to wait for its few suppliers to implement RFID, unless it is willing to share more of the cost than Retailer 7 does. These costs may come in the form of less favorable contract terms with the Brand Owner, or more costly tagging downstream at the DC or even at the store itself.
Example: Vertically integrated brand owner/retailers enjoy the shortest path and greatest benefit
Pictured below, the vertically integrated business that manufactures its own apparel under BO 1 and sells it through Retailer 1 has the shortest path to RFID benefits. BO 1 can implement efficient, across-the-board systems for RFID in manufacturing and logistics. Retailer 1 receives most, if not all, of its product with tags and can implement similar, holistic systems for RFID at the endpoint.
Vertically integrated apparel retail businesses find RFID more attractive
For vertically integrated businesses, not only is RFID implementation more efficient at the endpoints, but also in the supply chain. With items tagged at source and associated in transit with case, pallet and even container, the business can more efficiently manage export, import, financing, title transfer and customs duties.
It’s for these reasons that a disproportionate number of retailers implementing RFID are those that exert significant control over their source of supply, if not complete vertical integration. Notable examples include: Zara, American Apparel, C&A and Charles Voegele.
Waiting for the “Tipping Point”
No RFID conference passes without someone yearning for the future “tipping point,” the point at which manufacturers are tagging enough of their output to “just tag everything.” Rather than waiting for this moment, the industry should look for mechanisms to accelerate this event by distributing the cost, benefits and control of RFID more equitably across the industry, especially by looking for ways to facilitate realization of value by apparel brand owners and manufacturers. Developing an ROI for the supplier is key. A good target for such a program might be suppliers who have a high frequency of chargebacks from mis-packed items (wrong size, colors, SKU, quantity), as they stand to gain the most through the improvements RFID could make to their logistics operations. One can imagine an RFID-as-a-Service program aimed at them, with a monthly fee rather than upfront capital cost, financed by the savings from chargeback reduction.
The recent announcement of Tagged Item Grading at NRF, mediated by the good offices of GS1 is another example. This new standard shifts the choice of tag from the retailer to the manufacturer, enabling the manufacturer to consolidate tag demand and realize lower pricing.
GS1 and the yearling RAIN coalition should make identifying additional opportunities a top priority.
1 To appreciate mix complexity, search the Target website for “denim jeans.” Not every one of the 395 hits has the 50 size combinations this style of jeans has, but it’s easy to imagine an average of 10 per style, or 4,000 SKUs. -- Return to article text above 2 Average-unit-retail price, the out-the-door price after discounts -- Return to article text above 3 51% (Kang and Gershwin, 2007) -- Return to article text above 4 65% (Raman, DeHoratius, and Ton, 2001); , also, Professor Bill Hardgrave, Auburn University Harbert College of Business Dean in numerous public communications -- Return to article text above 5 This is even more costly if different retailers specify different tags. Fortunately, Tagged Item Grading, or the Tagged Item Performance Protocol (TIPP), shifts the choice of tag from the retailer to the apparel vendor, eliminating this additional layer of complexity. -- Return to article text above 6 “BO” here represents brand owners and their wholly-owned or contracted manufacturers. -- Return to article text above 7 According to Wikipedia, and my microeconomics professor, the “…burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply.” In this case, the cost of the tag (modeled here as a tax) does not depend on who buys the tag from the service bureau, but rather, on a combination of who wants it the most and who has market power in the relationship between brand owner and retailer. http://en.wikipedia.org/wiki/Tax_incidence -- Return to article text above
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