“RFID is pioneer territory and in the end, the pioneer lies with his face in the mud and an arrow in his back!” said one participant recently at an RFID convention in Germany. Potential RFID benefits for manufacturers, retailers and customers still appear to be a pipe dream. But the question of whether there are retail segments that will benefit sooner, or more than others, from a timely implementation of the RFID technology is gaining in significance.
Elsevier Food International, Vol.9, Number 2, May 2006 Jürgen Elfers and Heiko Ulrichs

The term RFID (radio frequency identification) qualifies as the buzzword of the year in the global retail industry. Although practically everyone is talking about this subject, key aspects of this issue cannot even be derived reliably or presented in a clear-cut manner. Although there is sufficient information on the existing problem areas, hardly any expert reports can be found on concrete investment requirements and the potential for cutting costs.


Despite this, RFID is considered to be a solution to the problem that most traditional food retailers in western and eastern Europe as well as in North America are facing: competition from food discounters.
Discounters are lean, efficient and streamlined companies that originally gained their price leadership through a self-imposed restriction (or perhaps focus) on the range of goods offered. However, they have now morphed into logistics experts.
Supermarkets, superstores or hypermarkets appear to have little leeway in combating this form of competition. Food discounters have been gaining market shares in all of the major western European markets for years now, mainly driven by a comparatively very low price of the average basket of goods. Discounters have a largely streamlined form of sales in which staff involvement has been reduced to a minimum. Supermarkets, superstores and hypermarkets, which have a suitable level of breadth and depth in their range of products, have been suffering from diminishing market shares and eroding margins, driven particularly by complexities in the logistics functions and the accompanying large expenditure for handling goods as well as from a relatively high staff intensity that, at least in Germany, appears to have hardly any potential for further cost savings following years of efforts to streamline these activities.

Quantum leap
For modern food retailers, a solution to many of their problems may emerge through technological progress. The RFID tag makes a quantum leap possible in automating logistics functions and, later on, also in the checkout function (which in our view is the ultimate objective of all RFID efforts). The combination of a significant gain in speed and savings potential in the expensive input factor of staff offers efficiency gains that are likely to enable the modern food retailer to obtain a reasonable position in the market with competitive prices and improved operating margins. In the medium term, this is likely to improve the value proposition of those retailers that take the lead in introducing RFID to such a great extent that they can also expect to generate further revenue advantage.
RFID is rightly the buzzword in the industry, but who actually stands to gain the most from this technological advance? For those retailers already positioned very efficiently in terms of logistics functions, the refinement of barcode technology is likely to be a priority for many years to come. However, the more complex a retailer’s set-up (i.e. the larger the number of different stock keeping units (SKU) on the shelves at the point of sale (POS)), the larger the potential appears to be to enhance efficiency by using RFID. Particularly in the Anglo-Saxon countries, where competition from discounters of the German variety is still nascent, logistics functions represent a much larger expenditure in relation to product value than is the case in Germany. Therefore it is understandable that the Tescos and Wal-Marts of this world, in particular, are aggressively pushing the introduction of RFID technology. These companies have the greatest potential for increasing shareholder value.
Germany’s main retailers will not approach this technology until clear-cut standards have been set with respect to technology and the key data for items. Metro Group is likely to focus on the introduction of RFID technology particularly at its food units (Real, Extra) in order to be able to return to forms of distribution, currently considered expensive, at more attractive prices with acceptable operating margins. Real (hypermarkets) and Extra (supermarkets), are Metro Group’s current problem areas, so any efficiency gains must, at least in the short term, be reinvested by way of price reductions in order to regain the trust they lost with customers.

A new discipline
Companies that take the lead in introducing RFID will become more attractive to shareholders for the sole reason that RFID leads to total transparency in the logistics functions. Retailers, understandably, will be unwilling to share this transparency with their suppliers – at least until it is clear that the increased transparency does not have a detrimental impact on terms and conditions (arising, for example, from recognised logistics inefficiencies on the retail side for which the supplier is not responsible). Therefore, RFID technology is likely to exert a new discipline on retailers, and could provide added value for shareholders even before the technological quantum leap takes place, simply because retailers will have to focus on enhancing efficiency in their logistics functions in connection with the introduction of RFID technology.
Logistics expenditure now accounts for up to 25 per cent of the product value. If companies were able to achieve a reduction in overall logistics expenditure even of only ten per cent, this could allow them to either invest heavily in prices or to radically increase profits. The ultimate move to a fully-automated checkout function would generate the potential for cost saving which, in the case of German retail for example, would amount to 2.4 to 3.5 per cent of total German retail sales. Although the ultimate efficiency gains are only likely to materialise from 2010 onwards, the efficiency of the logistics function should be steadily enhanced along the way.

Discounters’ superiority
The connection between efficiently positioned retailers and the expected investments and expenditure required for a technology switch quickly becomes evident: the more efficient a retailer’s logistics functions are, the less the marginal gain arising from a technological advance appears to be.
On the other hand, the higher the logistics expenditure is in relation to the purchase price of a product or the lower the purchase prices are in general, the more optimised logistics processes gain in relevance. However, the following correlation is also true: the higher the turnover, the lower the need for employing RFID technology. A slow turnover rate makes it necessary to know exactly where particular goods are, and in what quantities, within a company’s logistics chain (best before dates, overhang goods, follow-up orders, etc.).
With respect to all of these aspects, the discounters are superior in logistical terms. But retailers’ current attention on RFID and logistics is leading to efficiency gains in the run up to a complete RFID roll-out. Such gains not only represent the competitive advantages of tomorrow (at least vis-à-vis other superstores and hypermarkets) but they now also create shareholder value by way of a successive reduction in the costs of logistics functions (through companies’ overall more efficient logistics functions).

Potential for apparel retailers
How valid are current organisational structures and processes when RFID will be implemented at some point in the future? For companies with less complex product structures and for those which completely control of the supply chain, it is beneficial to act quickly. In this respect we see great opportunities to increase added value for the apparel retailers, particularly as those companies which we view as having a pioneer role in RFID implementation are vertically integrated and have complete control over the supply chain. Therefore apparel retailers such as Adler, Esprit, Hennes & Mauritz and Inditex (Zara) would be of interest to investors.
For apparel retailers, the drivers of shareholder value are identical to those of the modern food retailer. The clear focus is on the automation of the product flow, at the checkout as well as in the tracing and tracking of goods which RFID makes possible. Efficiency gains and hence the potential to increase shareholder value can be directly achieved much sooner than at a modern food retailer with a complex product structure. We anticipate the introduction of RFID tags at the item level with such vertically integrated apparel retailers as early as this year as tag prices should fall quite quickly, particularly in the case of large order volumes.

Tag prices plummeting
The momentum in the market for RFID technology should not be underestimated. For example, Kaufhof teamed up with the German apparel distributor Gerry Weber on a pilot project to introduce RFID in 2003 and came to the conclusion that the use of RFID would only make economic sense on the basis of reusable RFID tags (assumed price of €0.50, including anti-theft protection, a so-called combination RFID tag). The results obtained in the spring of 2005 are already outdated because tags can now be bought at prices that the pilot project did not factor in until 2009 to 2010.
Hence, Kaufhof is to run a trial on the basis of one-way tags for selected apparel stock keeping units (SKU) at selected outlets. It is immediately apparent that the changed assumptions for investments in tags will have a dramatically positive effect on profitability. Assuming current prices of €0.08 to €0.09 per tag (inlay – a semi-finished product consisting of chip and antenna), the price for marking items, including sticker labels, is around €0.12. This is almost at par with the prices for labels generally in use today of €0.01 to €0.10, depending on the quality (the estimated average price is between €0.04 and €0.05).
The ultimate efficiency gains will, however, not be achieved until both the distribution centres and the outlets of the major apparel retailers are equipped with RFID hardware. For this last step, however, the breakeven calculations of the pioneering companies depend materially on the support of technology leaders. In other words: much like the Metro Future Store project, technology leaders such as IBM, Intel, Philips, SAP, Siemens and Wincor Nixdorf will be called upon to provide retail pioneers with RFID technology “at next to nothing” in the interests of both parties. Whereas the major technology leaders are dependent on shining examples to succeed in a global rollout of RFID technology, the trailblazers at retailing level can only make a truly profitable business case for RFID if investments in hardware (and system integration) remain manageable. It is also with respect to this that RFID can create shareholder value for today’s retailing pioneers, which in the medium term should lead to considerable automation gains and hence, ultimately, to gains in market shares through increased speed, and, at the same time, more attractive prices for customers.

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Dr Jürgen Elfers is head of Commerzbank’s European retail team, of which Heiko Ulrichs is a team member.