Vendors Tighten Their Belts

Dec. 1, 2006—Talk to companies providing radio frequency identification hardware and software these days, and you are sure to hear a lot of moaning and groaning. Companies that last year increased their payrolls to meet an expected increase in demand for products are now tightening their belts. At least three companies have laid off employees. Many others are cutting back on marketing in an effort to conserve cash.

Why has the industry fallen on hard times? The answer can be summed up in one word: volume. While many companies are piloting or rolling out RFID systems, they are not buying large volumes of tags and interrogators. For example, many of Wal-Mart's suppliers in the United States are tagging only a few stock-keeping units (SKUs). Companies that sell RFID labels say that some large suppliers have actually scaled back their purchases of tags. It's not clear why, but some speculate that it has to do with the pace of Wal-Mart's rollout.

While many companies are piloting or rolling out RFID systems, they are not buying large volumes of tags and interrogators.

Earlier this year, Wal-Mart's CIO, Rollin Ford, who replaced Linda Dillman last April, initiated a review of the company's RFID plans. The rollout slowed as the company evaluated the value of the RFID systems being introduced. Many suppliers saw the slowdown as a signal that they didn't need to ramp up the number of SKUs they were tagging for Wal-Mart.

Target has not expanded its RFID rollout beyond one distribution center, so companies are not significantly expanding the number of products they are tagging for the retailer. Sources say Target is exploring in-store applications to better serve customers and is not as focused on supply-chain efficiencies as Wal-Mart. These sources say Target won't roll out RFID to more stores and DCs until it has developed applications that will deliver a return on investment.

In Europe, Tesco and Metro saw their rollouts of RFID slow because of the poor performance of UHF RFID under the old regulations established by the European Telecommunications Standards Institute (ETSI). The regulations were revised to provide more bandwidth for UHF RFID systems and to allow interrogators to emit more power, which improves read range. Second-generation Electronic Product Code technology that operates on the new ETSI regulations has only begun to hit the market. Tesco and Metro say they will expand their rollouts but they have not required suppliers to tag products, so it's not clear how much demand for tags and interrogators will increase in Europe.