Home Internet of Things Aerospace Apparel Energy Defense Health Care Logistics Manufacturing Retail

Economic Meltdown Effect on RFID: Not Now, Not Ever?

This is the first installment of a two-part series on how deteriorating economic conditions could impact the RFID industry. Part 1 focuses on the current adoption climate and short-term outlook. Tomorrow's conclusion examines whether conditions will trigger consolidation and reshape the RFID vendor community.
Nov 05, 2008This article was originally published by RFID Update.

November 5, 2008—Q: When is a worldwide economic meltdown not bad for business?
A: When you're an RFID company, apparently.

So far the RFID industry is showing few ill effects from the ongoing crises in the banking, credit, stock and housing markets, and industry observers contacted by RFID Update feel current conditions may only represent a hiccup in RFID adoption. The recently concluded third quarter was strong for the RFID industry, and the long-term outlook is very positive. However, there is a sense that the worst is yet to come for the RFID providers, and will start to be felt in the next few months. The severity and duration of the fallout are sources of great speculation.

Several industry professionals feel current conditions have more potential to reshape the RFID industry than to slow it down. The commercial credit crunch may be a catalyst for an industry shakeout and consolidation that was already expected to occur over several years. Unlike most other industries, many leaders of the RFID industry are privately held firms. Private equity is said to be especially tight, so investors may not be able to put needed cash into their holdings, or may need to sell them off to meet other capital requirements.

RFID Update examines these issues in a two-part series. Today's installment focuses on the outlook for RFID adoption through 2009. Part 2 examines how the economic climate could change the RFID provider landscape.

What Recession?

In recent weeks news from the RFID industry has mostly run counter to overall economic conditions, but some warning flags have been raised. First the good news:
  • This week ABI Research affirmed the projection it made earlier in the year that RFID sales would reach $5.3 billion worldwide in 2008, with annual growth of more than 25 percent in several closely watched segments including item-level tagging and asset management (see ABI Predicts RFID Growth Despite Economic Slowdown). ABI also predicted compound annual growth would average 15 percent for the next five years.
     
  • Intermec and Zebra each reported record third-quarter revenues, and Motorola reported its Enterprise Mobility Solutions business, which includes its RFID operations, were a bright spot in a down quarter, posting revenue gains of 23 percent. It is important to remember that RFID accounts for a small percentage of overall revenue at these and other public companies, which makes it difficult to determine if RFID activity is consistent with overall results. However, Avery Dennison said its RFID revenues tripled in Q3.
     
  • One of the leading analyst firms that follows the RFID industry, Robert W. Baird & Company, noted in its October market report that most RFID companies it spoke with had not seen any effects of the economic situation on their customer project activity.
But not all the news was good.
  • Baird also reported that its monthly survey of resellers showed declining confidence in the RFID market. Baird expects the economic downturn to lead to a delay in many RFID project deployments.
     
  • Avery Dennison, Intermec, Motorola and Zebra all commented on weakening business conditions in their Q3 earnings reports, and expressed caution and/or lowered estimates for Q4.
     
  • In commenting on Intermec's Q3 results, Chris Quilty of investment firm Raymond James said, "Nonetheless, deteriorating economic conditions and a concomitant slowdown in corporate investment are likely to create stiff headwinds going into 2009. Consequently, we expect Intermec's 2009 North American growth rate to slow dramatically, in the range of the low single-digits." Despite the slower growth, Quilty expects Intermec to outperform the market.
     
  • Gartner lowered its IT spending forecast for 2009 by more than half, predicting an overall spending increase of 2.3 percent.
     
  • The RFID Journal LIVE! Canada event scheduled for December, 2008 in Toronto was postponed until 2009 "due to the current economic uncertainty."
As these mixed messages suggest, the results from the market turmoil and economic slowdown are not likely to be felt evenly throughout the RFID industry. Projects that show a clear and fairly quick ROI are likely to be allowed to move forward, implementations may grow at organizations who remain consistent or tend to do well in tough economic times (e.g. hospitals, discount retailers), and other firms may invest in RFID if it allows them to reduce labor, raise asset utilization or otherwise improve their cost structure, industry observers say.

"In a downturn, the level of project spending gets further scrutinized," Baird analyst Reik Read told RFID Update. "CFOs want to see a payback in six to eight months. Companies we're talking to in the bar code industry say as a result of that some good projects are being delayed."

Read thinks the retail and healthcare industries represent good opportunities for RFID growth in these conditions, and notes that RFID pilot projects may be low-budget enough to escape company cost-cutting measures. Perhaps surprisingly, Read also expects RFID implementations to grow in the beleaguered financial services industry.

"One of the mandates these guys have, especially the largest companies, is to improve their asset utilization. They have huge data centers, which offer many opportunities for improvement," Read said, noting that RFID systems have demonstrated good ROI potential for IT asset management (see Banking Interest Climbs for RFID, Spurs Standards for more coverage of financial industry initiatives).

"2008 has already been a bad year for retail, but it has been a good year for apparel projects," Read said. "I think that will continue."

ABI Research director Mike Liard joins Read in expressing a positive outlook for retail initiatives. He is particularly positive about adoption for apparel item-level tagging, compliance-driven case and pallet tagging, and contactless payment systems. Growth rates for these segments are estimated at around 25 percent.

"More than ever, RFID can impact the challenges to the bottom line in retail, such as reducing out-of-stocks," Liard said. "Retailers need to have the item in stock when the customer has money to spend -- now more than ever."

Economic conditions could trigger well-positioned RFID companies to go on shopping sprees of their own. The industry was expected to undergo consolidation even before the economy went bad, and a prolonged period of slow sales prospects and tight credit could lead some companies to merge or be acquired. The likelihood of that scenario will be examined tomorrow in the conclusion of this series.
  • Previous Page
  • 1
  • Next Page

Login and post your comment!

Not a member?

Signup for an account now to access all of the features of RFIDJournal.com!

PREMIUM CONTENT
Case Studies Features Best Practices How-Tos
RFID JOURNAL EVENTS
Live Events Virtual Events Webinars
ASK THE EXPERTS
Simply enter a question for our experts.
TAKE THE POLL
JOIN THE CONVERSATION ON TWITTER
Loading
RFID Journal LIVE! RFID in Health Care LIVE! LatAm LIVE! Brasil LIVE! Europe RFID Connect Virtual Events RFID Journal Awards Webinars Presentations
© Copyright 2002-2016 RFID Journal LLC.
Powered By: Haycco