Down, but Far From Out

For a technology that's supposed to burrow into every corner of our lives someday, it wasn't an auspicious step.

Wal-Mart Stores Inc. was preparing to launch a test of RFID technology last June, in cooperation with Gillette Co. RFID, or radio frequency identification, involves tiny computer chips that transmit radio signals that can be read by a scanner. RFID chips already are common: They're in the E-ZPass transmitters that allow drivers to zip past tollbooths, for example, and in the ID cards that employees use to open office doors. But it is retailers like Wal-Mart that hope to make these chips ubiquitous, using them to tag all sorts of products in an effort to make inventory tracking more efficient and help prevent theft.

Wal-Mart intended to try out the technology at a store in Brockton, Mass. The plan was to glue RFID chips to pricey packets of Gillette's Mach 3 razor blades being sold in the store and wire the shelves to track them. With such a system, every time a product leaves the shelf, that information can be fed to security cameras and cash registers in the store, to prevent theft, and to stockrooms and warehouses, to help keep inventory flowing at an optimal rate.

WEAK SIGNAL • Business Innovation: Super Market 12/05/03   • Tech Q & A: Radio Tags Raise Privacy Concerns 12/01/03   • Tracking Chips Stir Privacy Debate 07/29/03   • Wal-Mart Requires Use of 'Smart Tags' 06/13/03

The experiment was canceled, though, before it even started. Credit for the abrupt about-face was soon taken by privacy activists, who had waged a campaign in the local media against the tracking technology because of fears that it could someday allow marketers, the government or insurers to compile details about individuals' shopping habits, or even allow people's movements to be tracked. A few days later, Wal-Mart protested that it simply had elected to focus on a far bigger, more immediate need: to upgrade its massive warehouse operations with RFID tagging. Wal-Mart wants its suppliers to tag their shipments to the retailer so that inventory flow can be tracked and recorded more easily. But Wal-Mart's warehouse plan, too, has drawn a mixed reception, with many suppliers worried about the cost of tagging everything they ship to the retailer.

Privacy protests and cost concerns have dogged other retailers testing the technology, too. But RFID isn't being abandoned. Instead, retailers simply are lowering their sights -- for now.

Wal-Mart's current goal, for instance, is for its suppliers to use RFID chips to tag all cases and pallets shipped to three of the retailer's distribution centers in Dallas starting next year; those warehouses serve just 150 of Wal-Mart's 4,000 stores. The plan saves the suppliers the expense of tagging each item they ship. But in the end, when the price of RFID chips comes down, retailers still envision a chip on every item on store shelves.

The apparel industry is among the most enthusiastic about RFID. Clothing retailers are likely to begin tagging individual items with RFID sooner than other merchants, since a shirt or jacket carries a far higher per-unit price than, say, a jar of peanut butter, says Dave Shoemaker, senior vice president at Checkpoint Systems Inc., a Thorofare, N.J., technology consulting firm. Also, with the diversity of their offerings, clothing retailers could make particularly good use of the real-time sales data that RFID makes possible.

For instance, every time a yellow sweater, size large, is sold, those details and the location of the sale could be entered into a retailer's computer system when the item is scanned. And that would allow the company to move more quickly to direct merchandise to where a given style is selling well.

The apparel industry isn't immune to RFID public-relations challenges, though. Having completed a month-long pilot program this fall in which it tracked clothing shipments from warehouses to its stores, British retailer Marks & Spencer PLC said the results were encouraging, but added that it plans to limit its use of the technology to warehouses and the back of its stores -- it won't use RFID at the cash register.

Marks & Spencer cited privacy concerns, and it's not hard to understand why. Last spring, just three months before Wal-Mart and Gillette backtracked on their smart shelves, Italy's Benetton Group SpA had announced plans to put RFID tags on 15 million pullover sweaters. Benetton said the tags would help keep shelves better stocked with the right sizes and colors. But the idea didn't last long after it provoked a boycott under the slogan "I'd rather go naked."

"The minute you put a trackable tag in something that people can pick up and take home, that's where we draw the line," says Katherine Albrecht, founder of Consumers Against Supermarket Privacy Invasion and Numbering, or Caspian. The group led last year's campaigns against Wal-Mart, Gillette and Benetton, and helped spark lively RFID protests against Marks & Spencer and fellow British retailer Tesco PLC.

But in most boardrooms today, it's money, not privacy, that's dominating the debates on RFID. And much of that discussion has focused on Wal-Mart's warehouse initiative.

Jeff Woods, an analyst at research and consulting firm Gartner Inc. of Stamford, Conn., says manufacturers have been complaining to him that they expect Wal-Mart's plan for RFID tags on cases and pallets shipped to the retailer to add to their costs. And retailers also face significant outlays to set up RFID systems. A November study by A.T. Kearney, a Chicago consulting firm, found that major retailers will have to spend an average of $400,000 per warehouse and $100,000 per store on a typical package of RFID sensors and wiring. To integrate the systems across their chains, they'll spend an additional $35 million to $40 million each, Kearney estimates.

Cincinnati-based Procter & Gamble Co. has been conducting pilot RFID programs for more than a year in its warehouse operations, but sees limits to the technology until the cost of tags comes down.

While an RFID tag priced around 15 cents is currently considered a good deal, Procter & Gamble sees case-and-pallet tags becoming widely practical at "five cents or less -- and our focus is on the less," says Paul J. Rieger, who directs supply-chain innovation for the consumer-goods manufacturer. For item-level tagging to be practical, "we've talked about [the cost per tag] being in the penny range, or less, and it's going to take two to four years before we get there," he says.

Bob Kleist, Chief Executive of Printronix Inc., an Irvine, Calif., firm that sells the tags that house RFID chips, says his company's prices will be driven down by one thing: sales volume. For four to seven years, prices will be such that most item-level tagging will be limited to small, high-priced items like razor blades, lipsticks and over-the-counter drugs, Mr. Kleist estimates.

But once item-level tagging becomes widespread in stores, P&G's Mr. Rieger says, the payoff will dwarf his company's investment in RFID. P&G estimates that it loses 8% to 10% of its global sales each year because its items are out of stock at stores. "If we could reduce that number to 2% or 3%, then all this technology will be a huge bargain," he says.

The RFID pitch doesn't end there, either. Once individual items can be tagged throughout a store -- a goal that's five to 10 years away by most reckonings -- retailers aim to tackle another major cost and a hassle for shoppers: checkout lines. Instead of having each item scanned by a clerk, shoppers will simply whisk their shopping carts past RFID readers that will ring up their contents instantly, says Ken Keating, world-wide director of marketing for International Business Machines Corp.'s retail-store solutions unit. With fewer cashiers needed to keep traffic flowing smoothly, stores will save on labor costs and have additional floor space to sell merchandise.

The idea is being tested by Metro Group AG, which is operating a "store of the future" in Rheinberg, Germany, equipped not only with self-checkout kiosks but also with "smart" shopping carts that suggest products shoppers might be interested in. IBM is working closely with Metro on the project.

For those opposed to the proliferation of RFID, it seems clear that the battle to make the technology go away is a hopeless one. The key, rather, will be to influence the debate on what limits to set for the technology's role.

"The advocacy groups have been very successful at preventing the technology from being driven just by its vendors," says Evan Scott, a Philadelphia-based consultant to RFID technology companies. "The privacy groups are not going to stand in the way of the technology, but they will always be there, and their concerns will always have to be addressed."

-- Mr. Covert is a reporter for Dow Jones Newswires in New York.

Write to James Covert at james.covert@dowjones.com

Updated January 12, 2004