))) Commitment From Wal-Mart May Boost Tracking Technology

Crayton Harrison
July 15, 2003

In theory, a technology called radio frequency identification could change your world.

Imagine tiny chips that emit radio waves embedded in clothing, food packaging or your wallet to broadcast information about what you have and what you may want.

Turning theory into reality is easier said than done, of course, and RFID technology has been struggling for decades.

That may soon change. Retail giant Wal-Mart Stores Inc. has committed to push RFID forward, bringing the technology a highly influential advocate. In the next few years, Wal-Mart and a diverse roster of companies, including Texas Instruments Inc., Microsoft Corp. and Procter & Gamble Co., are expected to set common standards and practices that could make RFID as ubiquitous as bar codes.

Experts dream of a day when just about every physical object has a digital marker that makes it as easy to track as an e-mail crossing the Internet.

Computer networks could follow a can of Coca-Cola through its life cycle. Beginning at the plant, the can would be tracked though the distribution channel to stores to the consumer's refrigerator to consumption to recycling. All along the way, Coca-Cola Co. could gather data that would help future marketing and logistics.

The consumer would benefit, too. A "smart" refrigerator could use RFID to take an inventory of Coke cans, tell its owner when it's about to run out and get permission to order more from the grocery store.

Thousands of technology issues, not to mention privacy concerns, remain for retailers, manufacturers and others to work out. But the path toward RFID adoption matters, analysts said, because Wal-Mart and others are laying the groundwork for technology that could affect the way we shop and consume in the future.

"It's one thing to say RFID has potential," said Jeff Woods, a principal analyst at research firm Gartner Inc. "It's another to say how it's going to be used."

Radio frequency identification technology has been around in some form since World War II, when it was used to identify warplanes as friends or foes. Scientists in the 1960s learned how to adapt the technology onto silicon chips, which were attached to clothes and other retail items and would set off alarms if stolen.

Steady growth

Chipmakers such as Philips Semiconductors and Dallas-based TI have since made those chips able to hold much more information and fit into different shapes and sizes - woven inside clothing, slipped into a paper-thin tag or molded inside a key chain.

RFID is now seeing steady growth as a consumer payment tool, such as Exxon Mobil Corp.'s SpeedPass, a key chain device that stores customer information for faster payment at the gas station. Even smaller companies, such as beauty product start-up IMX Cosmetics Inc., are adopting RFID technology to help customers keep track of their favorite purchases.

IMX, with locations in three ritzy U.S. department stores, including Barneys New York, uses a large machine to mix custom blends of lip glosses. Customers are given a key chain fob - made from the same mold as the Speedpass - that stores exactly which mixture of colors and finishes they've ordered before. The customer scans the fob against the machine's card reader, and it mixes custom lip gloss.

"We originally targeted teens and tweens, younger shoppers who would like something new and different," said Dr. Julie Bartholomew, who founded IMX. "But we've found it works well for the experienced shopper who knows what she wants."

Multiple uses

Other companies, from McDonalds Corp. to American Express Co., have also been experimenting with RFID as a payment system. The technology has also found uses as a way to scan security badges at workplaces or patients at hospitals or to track dock shipments, library books and cattle.

Meanwhile, a quieter but potentially more sweeping revolution is going on behind the scenes. Companies are slapping radio-emitting tags on the crates and pallets they use to ship products to stores. At the same time, they're installing RFID readers into warehouses and distribution centers.

Retailers can use the technology to know exactly what's in the warehouse. They can see if a problem is clogging the flow of goods somewhere in the distribution center. And they can monitor whether items are being stolen or lost.

This, analysts say, could be the trend that puts RFID into the mainstream, as long as companies can use the technology in a way that actually solves their problems without significantly adding to the cost.

That's where Wal-Mart comes in. The retailer has carefully tested RFID in distribution, and likes what it sees, said company spokesman Tom Williams.

"So much of our product comes to our distribution centers, goes in one door and goes out to the docks. A lot of times it's not even there one day," Mr. Williams said. "We track our inventory very well right now, but we see tremendous efficiencies with RFID, too."

Arkansas-based Wal-Mart was so pleased with the technology that it wants its top 100 suppliers using RFID tags on every case and pallet of products they ship to the retailer by 2005. In 2006, all suppliers will have to do the same thing.

Wal-Mart recently shut down an experiment that used RFID to monitor its stocks of Gillette razors on store shelves. The company wants to concentrate its resources on the supply chain, Mr. Williams said.

At the same time, Wal-Mart is working with the scientific groups that create standards for RFID technology, essentially ensuring that all RFID tags can broadcast and read information from each other.

With Wal-Mart behind the technology, the rest of the retail industry has little choice but to fall in line, analysts said.

RFID manufacturers have mixed feelings about Wal-Mart's involvement. They're happy to see such an industry force commit to the technology, and know it could mean big sales to the company and its partners. Because of its size and importance to consumer products companies, Wal-Mart is essential to RFID's success.

Wal-Mart worries

But manufacturers are concerned about Wal-Mart's power in the process of making sure technology made by different companies works together - the process of developing standards. The retailer might guide the technology to be too specific to its own needs and make it harder to sell to other companies, they fear.

And then there's the issue of price. Wal-Mart has made no secret that it believes each RFID tag should cost no more than 5 cents. Companies normally charge about 10 cents apiece, and prices have fallen, but 5 cents is still a tough benchmark to hit.

Wal-Mart and other companies will have to be willing to commit to big purchases if they want lower prices, said Bill Allen, TI's marketing manager for RFID.

"We have to look at how much revenue it would generate, what profit margin we could get on how much volume at 5-cent tags," Mr. Allen said.

Companies interested in RFID technology may have been paying too much attention to price, analysts said. Whether tags are 10 cents or 5 cents, they're only going to be useful in the near future for higher-priced items and large packages of products, such as the cases and pallets Wal-Mart is tagging. Cheaper products wouldn't warrant the cost of using a tag.

And companies will need to add in the cost of many other things that come with RFID adoption. Employees will need retraining. The initial cost of setting up the system will be expensive.

"If the tags were free, they still wouldn't be on every item right now because of the infrastructure requirements," said Douglas Karp, senior director and general manager for ID products at Checkpoint Systems Inc., a New Jersey RFID company.

Using the data

Most dauntingly, RFID tags will generate terabytes of data about products' whereabouts that must be stored and used effectively to reap any advantage.

Software makers have to find ways to turn the data gained from RFID into useful information.

Companies that are adopting RFID also have to worry about privacy concerns. While the technology doesn't exist yet to steadily track consumer behavior with RFID, the thought is enough to unnerve privacy advocates.

Technology companies are already working on ways consumers could turn off RFID tags after they've left a store.

"Companies need to have that dialogue with consumer and privacy groups - here are our privacy best practices, and you can opt in and out - much as they did in online retail," said Christine Spivey Overby, an analyst at Forrester Research.

And retailers need to tell consumers about the cost savings they can pass along if RFID works and avoid talk of the technology's promise in the future, analysts said.

"Early adopters need to talk about what's realistic in the near term and not really get starry-eyed about these what-if long-term applications," Ms. Overby said.