August is traditionally a slow news month for the general-interest press. This is also true of the industrial press, since a big part of the technology market (i.e. Europe) spends much of August on vacation. Therefore the news of a 15% decline in the sales forecast for the RFID industry made big headlines in the last two weeks. Set against this troubling forecast, however, are examples of brilliance in the application of RFID technology. I will discuss one such example in the context of what I think is happening in the market.
RFID Market Activity
ABI Research provides market analysis and forecasts for a variety of industries, including the RFID industry. Their most recent quarterly estimate puts the size of the market for RFID services and software at $3.1 billion in 2007 (including all LF, HF, and UHF technologies). This is a 15% reduction in their previously published estimates. The reasons given for the lowered projection include consolidation among RFID vendors and service providers, the rise in collaborative solutions and the increasing availability of off-the-shelf RFID software packages.
I found this report to be a remarkable inversion of the usual process. When other technologies consolidate around market leaders who provide off-the-shelf products to enable collaborative solutions, their market explodes with potential. Total sales increase even though unit prices may decrease due to increased market efficiency. Any number of examples could be used to illustrate the process from the IT industry, from the initial success of the IBM PC through the convergence of software, technology and market conditions embodied by the I-pod. If the much-anticipated market consolidation of RFID were truly coming to fruition, why would sales be expected to decline?
The truth is that RFID is still far from a normal market, as I have noted in previous columns. The major retail compliance initiatives are moving forward at a steady pace, but well below previous expectations/hype. As an example, this week I heard from yet another client who negotiated a waiver for case-level RFID tagging due to the price of tags relative to their profit margin on the items sold. In any case, this part of the RFID field is properly called a mandate, not a market.
On the hardware side, the debate over HF and UHF tags in item-level tagging continues, particularly in the pharmaceutical field. The pharmaceutical field shows the greatest promise for harnessing RFID for profit and the public good, but is still nowhere near the level of maturity that the FDA projected five years ago. On the software side, each week brings an announcement of a new off-the-shelf product or a purchase of one company by another. As an example, this week's big news was IBM's announcement of a major new initiative in RFID tags and services for pharmaceutical applications. A careful reading of IBM's press release and website shows the heart of the initiative consists of giving Websphere increased capabilities to work with EPCGlobal data. While this is a useful capability, were any of us really staying up at night in anticipation of such a development?
ABI's market forecast for RFID is simply an acknowledgement that companies continue to be very careful in how much capital they sink into RFID projects, particularly when the compliance part of the market has such difficulties in showing a positive return-on-investment for retail-chain vendors. I would argue that the ultimate shape and strength of the RFID market is still being defined by innovation around the market-driving force of return on investment. One such example is currently underway at Japanese retail giant Mitsukoshi, Inc.
Item-level Tagging Pilot At Japanese Department Store
Mitsukoshi runs a chain of high-end department stores in Japan. They took a look at the arguments in favor of item-level tagging and implemented a pilot program for tagging women's shoes in 2004. Their goal was the same as the more-familiar Wal-Mart RFID initiative: increased sales and increased inventory accuracy. Mitsukoshi chose women's shoes as the initial product for item-level tagging because they knew that much of a shoe salesman's time is spent in digging through backroom stock to find a requested size. By issuing RFID readers to their sales force, they were able to provide faster service via a display of current stock. Mitsukoshi increased sales of these products by 10% while decreasing the average service time from 12 minutes to six minutes.
All of this could have been done with barcodes, but he pointed the way towards a new program that is being tested in one of Mitsukoshi's Tokyo stores. The team at Mitsukoshi decided to capitalize on the fact that most of their high-end apparel products were already supplied with RFID tags. Mitsukoshi installed RFID readers in the dressing rooms to determine the SKU number of a customer's selection (which contains both color and size information). The information could be displayed on the screen of existing Voice-over-IP phones used by Mitsukoshi. The VoIP phones were then programmed to allow a customer to select different sizes or colors of a garment immediately after trying-on a sample. Dressing-room attendants can get new items for a customer to try on without requiring the customer to leave the privacy of the fitting room. Mitsukoshi hopes to achieve increases in sales and reductions in service times that exceed the ladies-shoes pilot program.
The brilliance of this particular application of RFID technology is in how well it combines the elements necessary for the success of the RFID market. In the first case, it meets a real need and provides a positive ROI. It exploits off-the-shelf technologies already in-place at Mitsukoshi. The solution is collaborative for both technologies (RFID and VoIP) and people (increased collaboration between the customer and the apparel salesperson). Mitsukoshi is clearly betting that the public will react positively to the introduction of high-tech into the clothes-buying experience. They certainly have assembled all the right elements for RFID success in this project.
Conclusion
Innovation is occurring in the RFID market, but it is diffuse and application-specific. Most of the publicity for RFID is dominated by EPC compliance, but this portion of the market is moving sideways as shown by technical developments and market analyst's forecasts. The innovations that we see due to RFID technology are still largely due to pursuit of realistic goals in custom projects that address a specific need and provide an unambiguous return on investment.
Paul Faber is a Principal with Raleigh, N.C.-based Tompkins Associates, a supply-chain-solutions consulting firm. As the chief manager of RFID equipment implementation at Tompkins Emerging Technology Center, he possesses extensive experience in material handling solutions, systems integration, and installation. Paul has managed field integration and operations activities at material handling sites around the world.
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