After a stellar 2023 Holiday Season, most consumer analysts have been cheering the strong retail sales data spurred by manageable inflation and high employment levels. However, home furnishings and building materials saw weaker sales than other sectors, driven by slowing housing growth and stagnant home resale rates. According to the National Association of Realtors, the 2023 home sales were the lowest in 28 years.
Inventory is typically the largest operating expenditure and investment for a retail business. Retailers have been challenged to update prices and manage inventory carrying costs quickly enough to keep pace with inflation, supply chain fluctuations, labor costs, and interest rates. As a result, shrinkage has become one of the most scrutinized issues among retailers, and these concerns were highlighted during the recent National Retail Federation (NRF) trade show in Las Vegas.
Shrinkage is used in retail to measure the inventory dollars that are lost, stolen, or damaged during business operations. Shrinkage occurs for a number of reasons, including handling damage, administrative errors, theft, and obsolescence. It can significantly impact profitability, as it represents a loss of revenue, net profit, or assets that could have been reinvested or redeployed in the business.
Many retailers were touting the benefits of RFID, or radio frequency identification, during the NRF trade show as mission-critical for understanding how merchandise moves throughout stores and how it impacts shrinkage and theft. RFID uses electromagnetic waves to identify and track tags attached to objects. In a tight operating environment with little margin for error, RFID has become a bigger tool in retailers’ arsenals when it comes to merchandise visibility. As a result, RFID system providers, including AsReader, Avery Dennison, Nedap, Radar, and SML RFID, indicate they are seeing more interest from retailers in the technology than ever before, particularly given the current economic environment.
RFID technologies help retailers improve revenue and cost performance via better shrinkage reduction, more accurate inventory management (potentially reducing the number of out-of-stock occurrences), and lower labor costs. RFID can help drive a retailer’s transition to seamless omnichannel operations, allowing for distribution network inventory data, which supports online purchases, in-store pick-ups, and same/next-day deliveries. Retailers and their marketing partners can also create cross-selling opportunities via a better understanding of the location and quantity of inventory throughout any distribution network component.
Although RFID technology has been a driving force in retail inventory management for several decades, process, technology, and cost improvements allow RFID hardware and software to provide retailers with better tools for omnichannel fulfillment, data accuracy, and flexible customer relationship management.
RFID systems consist of three key components:
- RFID tags which store and transmit information about individual products.
- RFID Readers / Hardware sends and receives signals, allowing for data visibility from a tag, including SKU-specifics and location.
- Software that encodes RFID tags and gathers, stores, and analyzes RFID data.
An individual RFID tag costs approximately $0.04. WIFI-enabled RFID systems allow more accurate data capture over a broader area, making system deployment and integration quicker and easier. RFID Readers / Hardware costs have followed historical computer hardware price trends, dropping by over 50% over the last seven years. As a result, RFID system deployment costs have dropped dramatically, further improving the cost-benefit analysis for technology adoption and allowing retailers a faster route to cost improvements. Previous generations of RFID technology deployments provided insights once every 30 days. However, new technologies can provide real-time data, often coupled with time-stamped video. Some retailers commented at the NRF conference that they achieved 99% inventory accuracy and system payback within 12 months, even across chains numbering hundreds of stores. According to Accenture, 93% of North American retailers use RFID in some capacity, and those that have fully adopted RFID reported 10% ROI in 2021 compared to 9.2% in 2019. Beyond that, using RFID technology to eliminate out-of-stock inventory has allowed some retailers to increase revenue by as much as 2.5%
RFID systems are typically deployed in the following functional areas:
- Inventory Location / Tracking
- Distribution Network Operations
- Customer Relationship Management
Inventory location/tracking is the most widely used RFID application in retail. Accurate product location information can lower inventory management costs and improve fulfillment processes, thereby boosting customer satisfaction.
RFID can also provide highly accurate information about an item’s location in the overall distribution network. This can help store managers plan staffing requirements based on new product introductions, store replenishment, and customer pickups for online orders during sales / seasonal peaks.
More efficient store processes and improved resource allocation can better meet customer needs and shift sales associate priorities as marketing and omnichannel efforts adapt to market dynamics, ultimately improving cost structures. Self-checkout systems are a prime example, and RFID solutions can allow shoppers to scan and pay for items with their credit cards and/or smartphones, avoiding lines and saving time. Some retailers are now developing high-tech visualization tools where customers can receive personalized shopper-type customized information about size and color options, styling and visual presentation tips, and recommendations for complementary items. These technologies also allow retailers to gather high-level data, such as how many items were viewed, dwell times, and conversion/bounce rates by product. Each of these concepts creates opportunities for increased customer engagement.
Beyond sales transactions, return policies and procedures are becoming more important in customer relationship management. As e-commerce grows its share of omnichannel sales, a typical retailer experiences approximately 20% percent of online orders being returned. RFID technologies enable accurate and efficient returns processing, allowing returned goods to be reposted as prime stock inventory quickly, reducing margin compression in reverse logistics.
RFID and the Supply Chain
Retailers feel RFID will continue to unlock process inventory management improvements, creating better allocation of resources and reducing logistical bottlenecks with freight providers. RFID is experiencing such broad adoption that many retailers request that products be delivered to their receiving docks with RFID already built in. Some online retailers report approximately 70% of items in their online catalog are tagged via RFID before arrival at their distribution centers. Factories and manufacturers tagging products at the source can provide greater process and labor efficiencies than distribution centers and stores. These technologies improve supply-chain visibility so retailers can tighten inventory receiving schedules and manufacturers can more accurately track outflows and shipping. This allows for improved timing of raw materials ordering and production schedule planning.
RFID Implementation
Many enterprises rely on third-party integrators to roll out RFID systems. These integrators provide value chain expertise and impartial recommendations for optimized (both in terms of long-term flexibility and near-term economics) system rollouts and ongoing “control tower” skill sets for retailers. Strategic integrators also provide data analytics assessments that can be used to ensure accurate and usable information is available to all organizational functions.
RFID technology allows organizations to improve inventory management by locating inventory better, measuring stock levels, replenishing distribution networks, and completing the customer fulfillment processes, proving it can help retailers increase revenue and lower costs. Going forward, we believe RFID technology can increase customer engagement via higher levels of personal customization and more efficient and enjoyable shopping experiences.