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There is so much happening in the world of Retail RFID these days, it’s hard to know where to begin thisyear’s report. Walmart’s decision to initiate tagging of all men’s jeans, socks, underwear and t-shirts is cer-tainly big news, especially when you consider that some of the items being tagged sell for less than $5.

JCPenney is moving forward with RFID tagging in the footwear, denim and intimate apparel categories. Each ofits stores will be receiving tagged merchandise. Macy’s is similarly gearing up to use RFID in a big way. Earlier thisyear one of its most senior executives, the president of Macy’s Logistics and Operations, became the co-chair ofan influential cross-industry working group devoted to accelerating the adoption of item-level RFID in retail.

Specialty apparel retailers have been active too. The world’s two leading specialty apparel retailers — GAP Inc.and Inditex (operator of multiple retail banners, including Zara) — are both devoting energy to RFID. By the endof this month a significant percentage of the Banana Republic chain will be using RFID. Other retailers are alsoquietly moving forward.

The aim of this year’s Special Report is to provide context to help executives and managers understand theshort-term and long-term implications for their companies. Special attention will be given to the following ques-tions:4How significant is the Walmart announcement?4Has RFID safely crossed the chasm?4What is the prognosis for the department store channel?4What are the market share implications for retailers and suppliers?4How does RFID relate to mobile commerce?

The Walmart announcement

The Wall Street Journal, in a front-page article in late July, revealed Walmart’s plans for using RFID in the appar-el category in all of its stores beginning September 1, 2010. The key quote came from the executive responsible forthe company’s western U.S. stores. He said,“This ability to wave the wand and have a sense of all the productsthat are on the floor or in the back room in seconds is something that we feel can really transform our business.”

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Apparel’s 4th RFID Report examines the state of retail adoption of RFID andmakes the case that the technology has truly crossed the chasm and quietlyentered the mainstream. Retailers at all points on the price spectrum haveembraced RFID and are positioning themselves to steal market share from rivals and operate more intelligently. Opportunities exist for suppliers too.

By Marshall Kay, RFID Sherpas LLC

Ready For Liftoff:

RFIDIn the Apparel Industry

It’s important to realize that Walmart is at this stage just scratching the surface, deliberately focusing on a sin-gle high-priority use case — the use of RFID readers to improve on-shelf availability. Walmart’s management isno doubt aware that RFID can deliver value in other ways too. That is why I believe that by the end of 2013 everysingle piece of apparel sold by Walmart will have an RFID tag.

Years from now, when people look back on the progression of Retail RFID, this announcement by Walmart willlikely be remembered for two things:4Proving that RFID can add value in every type of retail environment, even in stores with extremely low price

points.4Being the impetus for the addition of greater production capacity by makers of chips, tags and readers, result-

ing in even further reductions in the price of these items.Walmart’s influence on the retail community is sometimes a bit puzzling. After all, should executives at a lux-

ury chain really care whether Walmart is or isn’t using RFID to manage inventory? Yet I can see how some in theretail community could view Walmart’s use of RFID as evidence of the technology’s maturity and utility. It's alsoquite natural for executives to wonder how their RFID programs stack up to Walmart's.

RFID has crossed the chasm

Geoffrey Moore, in his landmark 1991 book Crossing The Chasm, made an important enhancement to a well-known model explaining the pattern of adoption of new technologies [See Figure 1].

Moore believes there is a big chasm that separates the first two adoption groups from the remaining three, andthat technologies that fail to establish a beachhead in the Early Majority segment run the risk of perishing in thischasm. Central to his thesis is the notion that the customers in each of the five major customer segments purchasefor reasons different from the customers in the preceding segment. Unlike Early Adopters, who are looking to geta huge jump on their competitors, companies in the Early Majority segment prefer to be part of a herd.Today RFIDis taking flight because retailers with this Early Majority mindset now have sufficient confidence that this herd istaking shape.

The different segments of the Technology Adoption Life Cycle model each represent different market volumes.Innovators are the smallest group, at 2.5 percent. The next group, the Early Adopters comprise 13.5 percent. Andthen you get to the chasm. This suggests that a technology cannot be said to have crossed the chasm until morethan 16 percent of companies are using it. But let’s not forget that the real question is whether the technology isgoing to enter the mainstream or fizzle. And there is very good reason to conclude that Retail RFID has safelycrossed the chasm and begun entering the mainstream, despite the fact that less than 16 percent of retailers areusing it. If you take a “volumetric”approach and look at the size and influence of the retailers who are moving for-ward with RFID, it is clear that RFID is here to stay.


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Technology Adoption Life Cycle

Editor’s Note: This diagram combines elements of two different models, the Technology Adoption Life Cycle curve from Everett Rogers'1962 book Diffusion Of Innovations (New York; Free Press) and the chasm concept introduced by Geoffrey Moore in his 1991 bookCrossing The Chasm (New York; HarperCollins).

2.5% 13.5% 34% 34% 16%

Area under the curverepresents number

of customers

FIGURE 1

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These factors all support the conclusion that RFID has crossed the chasm:1. Walmart is throwing its weight behind item-level RFID in the apparel category. Walmart and Sam’s Club togeth-

er account for roughly 10 percent of the U.S. apparel market.2. Within the North American department store channel the retailers that are leading the charge are the largest and

most influential — Macy’s Inc. and JCPenney — and in each of those organizations RFID is being championedand driven by senior leadership.

3. GAP Inc., America’s largest domestic specialty apparel retailer, is in the process of enabling more than 100 of itsBanana Republic stores. The solution will be up and running in these locations in October 2010. Zara’s parentcompany Inditex is also closely evaluating the RFID opportunity.

4. Upstream benefits are being confirmed. European apparel brands Gerry Weber, Serge Blanco, and NP Collectionhave each begun source tagging 100 percent of their merchandise — even items destined for retailers who donot yet use RFID.

5. The world’s two largest loss prevention companies each understand that RFID is poised to become the primarytechnology inside their anti-theft tags. Each company is actively transitioning into this brave new world. Thisalone makes it all but certain that RFID is here to stay.

Prognosis for the department store channel

Unlike the specialty apparel retailers, who have a relatively high degree of control over their supply chains,department store retailers and the brands that supply them cannot fully leverage RFID without cooperating withone another.The extent to which they do so remains to be seen. Fortunately, there are some very encouraging signs.

The influential Item-Level RFID Committee has seen tremendous momentum in 2010. This working grouptook flight years ago thanks to joint sponsorship of the American Apparel and Footwear Association (AAFA) andthe Voluntary Interindustry Commerce Solutions Association (VICS). Today the group is also backed by theCouncil of Supply Chain Management Professionals (CSCMP) and the Canadian and American units of GS1, theorganization responsible for Electronic Product Codes. Don’t be surprised if other major associations come onboard shortly too.

In addition to excellent cooperation and support from these major industry associations, the Item-Level RFIDCommittee is being captained by senior executives representing two of the most influential companies in thedepartment store channel — Jones Apparel Group and Macy’s Inc. The group is succeeding in generating activeparticipation from most of the industry’s largest retailers and brands, and I have no doubt it will be the primaryvehicle for the type of effective collaboration needed to help these companies keep pace with specialty apparelretailers.

I am encouraged not only by the progress being made by the Item-Level RFID Committee, but also by the factthat mass adoption by Macy’s Inc., JCPenney and Walmart means that retailers such as Kohl’s and Target will notbe able to postpone RFID indefinitely. Nordstrom will need to be alert, too. Its primary competitor, Bloomingdale’s(owned by Macy’s Inc.), has already implemented RFID in one of its stores, with more sure to follow.

Market share implications

In the age of the intelligent store and the intelligent supply chain, companies that execute most effectively willsteal share from rivals. And they will do so for two reasons:4Stores that utilize RFID will be much more attractive shopping destinations. Better on-shelf availability, faster

checkout and amenities such as “smart”fitting rooms will each be a powerful draw.4By squeezing cost out of their supply chains — from factory to store — these companies will be continually

strengthening their balance sheets. This positions them to compete even more aggressively in future years andedge out weaker rivals.Not only does this have implications within channels, it also has implications across channels. Specialty appar-

el retailers have the opportunity to steal share from one another, but they also have a tremendous opportunity tosteal share from the department store chains, especially the ones that move too slowly.

Given this scenario, it is clear that Macy’s Inc., JCPenney and Dillard’s are demonstrating commendable fore-sight in recognizing the long-term competitive implications of RFID. While I have no doubt that they are excitedabout the ability to use RFID to solve chronic inventory management challenges, and I am certain they know thiswill help them compete more effectively within their channel, I also believe they are motivated in part by the exter-nal threat posed by specialty apparel retailers.


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Efficiency implications

Even though there will be winners and losers on the market share front, it is important to point out that RFIDis going to make the entire apparel industry more efficient. Just as the move from manual paper-based processesto barcodes significantly improved productivity and accuracy, the move from barcode-based processes to RFID-based processes will similarly create a step change in performance. Profitability rises as costs are driven out of thesupply chain, and this holds true for retailers and suppliers alike. Simply put, this is an instance where everyoneis a winner.

Even apparel suppliers currently concerned about whether retailers will pay an appropriate share of taggingcosts would have difficulty disputing the fact that RFID-based processes are superior to barcode-based processes.

Figure 2 is a forward-looking diagram that considers two dimensions simultaneously — changes in marketshare and changes in productivity. The diagram has four quadrants, with the top right quadrant being the “MagicQuadrant”that all should aim for. Every retailer will fall into one of these four quadrants.

For the sake of illustration I have made some subjective predictions of where certain retailers are likely to resideon the matrix by 2015 if they maintain their current trajectories. For more than five years I have monitored the levelof activity and interest displayed by these companies. It is clear which ones are positioning themselves to capital-ize on RFID technology and which ones are going to lose ground to rivals.

It’s worth noting that the same principles apply to suppliers as well. However, it’s premature to create a simi-lar matrix for suppliers. At this stage it is harder to make predictions about winners and losers because:4When a group of suppliers is required to satisfy a retailer’s tagging requirements, sometimes it is difficult to

know which suppliers are genuinely focused on leveraging RFID to create efficiencies and which intend to donothing more than the bare minimum.

The above matrix contains the author’s predictions regarding the extent of efficiency improvements and market share gains (or losses) that certain retailers will experience by the year 2015 if they follow their current RFID adoption trajectories.

No predictions are being made about the buying, marketing and merchandising decisions that each retailer will be making. Poor fashion sense, for example, is not one of the ills cured by RFID. Rather, the matrix speaks to the amount of share that can be captured throughimproved on-shelf availability and the introduction of select RFID-based applications that improve the shopping experience. Kohl’s is expect-ed to lose share to JCPenney, and this is distinct from any market share captured or ceded based on the performance of their merchants.

In terms of efficiency gains, the retailers that are expected to achieve significant benefits by 2015 are receiving high ratings because theyhave started first, not because the size of the ultimate opportunity within their stores is larger than within stores of direct rivals. The Y-axisis all about cumulative productivity improvement.

Market Share Loser

Major EfficiencyImprovements

Minor EfficiencyImprovements

Market Share Winner

American EagleOutfitters

Walmart

Macy’s

GAP

Dillard’s

Ann Taylor Lord & Taylor

Kohl’s

Target

Nordstrom

Sears

Talbots

The Limited

JCPenney

Bloomingdale’s

Banana Republic

FIGURE 2

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4It is unclear how department store retailers will reward the suppliers that are most willing to engage with themcollaboratively. Will they feature their collections more prominently in future seasons? Will they grant them amore favorable split of RFID tag costs than granted to others?

RFID and mobile commerce

Mobile commerce (or M-commerce) has generated considerable buzz. And for good reason. The number ofconsumers carrying smartphones is steadily rising. Shoppers routinely use their phones to access retail and socialnetworking websites. Once shoppers see something they want to buy they look to see which stores have the itemin stock.

Seeking to align real-time customer demand with real-time supply much more precisely, retailers are provid-ing online and mobile shoppers greater transparency into their inventory levels at specific stores. At the same time,these retailers are investing in “Inventory Locator” tools to help their store associates “save the sale” when adesired item is out of stock. And let’s not forget the amount of attention retailers are devoting to multi-channelinitiatives. Never has it been more important for retailers to have accurate information about their true on-handinventory positions.

M-commerce and RFID are competing for the information technology department’s limited resources. Andthere are exciting m-commerce applications that do not involve inventory visibility. One example is Wet Seal’siRunway application which lets customers search and view tens of thousands of outfits created each month bymembers of the Wet Seal Fashion Community on Wet Seal’s website.

But once you get a shopper excited about an outfit, it’s only natural to feed her reliable data about where shecan find it in her size. And with inventory positions constantly in flux — a problem exacerbated by theft — onlyRFID can provide the required level of precision to track this data. That’s why retailers that care about their m-commerce programs should accelerate, not delay, their adoption of RFID.

RFID in the Age of Consequences

It is impossible to overstate the significance of the fact that disposable RFID tags are now being applied to mil-lions of items with retail price points of $5 or less. Not only does this shatter the myth that RFID tags are tooexpensive, it also upends the presumption that RFID would first become a mainstay in the luxury category andthen gradually cascade down to clothing retailers with more modest price points. In reality, Walmart and JCPenneyare light years ahead of Nordstrom and Neiman Marcus.

The message is now clear. If you are a clothing retailer with price points similar to or greater than Walmart’s —and let’s face it, that means every clothing retailer — then RFID is right for you too. Gone is one of the classicexcuses for keeping RFID on the back burner.

We have entered a period that I call the age of consequences. Retailers who started early and are now in therollout stage are in the process of creating real separation between themselves and their peers. Market share willbe won and lost in the coming years. And there are opportunities for suppliers too, not only to steal share but alsoto create internal efficiencies.

The clearest sign that we have entered the age of consequences is that RFID is increasingly being discussed atthe Board level. And now that RFID has firmly taken root, executives will need to have credible answers whenasked to outline their adoption plans. In the past it was easy to trot out excuses such as, “no one is doing it,” “tagscost too much,” or, my personal favorite,“we’re keeping an eye on it.” Now that the truth has escaped, answerslike that will no longer suffice. 7

ABOUT THE AUTHOR

MARSHALL KAY is the founder of RFID SherpasLLC, a consulting practice devoted exclusively toRetail RFID. The company provides a range ofservices to retailers and suppliers, includingbusiness case analysis, compliance planning,

solution architecture, vendor selection and project management.The company also advises technology vendors, investors andindustry associations. Prior to launching this practice Marshalldirected the North American RFID program of retail consulting firmKurt Salmon Associates. Web Address: www.rfidsherpas.com

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PRESIDENTGerald C. Ryerson

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