Oct 30, 2013Avery Dennison expects its RFID-related revenue to grow by 20 percent this year, thanks to new business that it captured from European retailers. The company's executives provided a comprehensive update regarding its radio frequency identification initiatives at its third-quarter earnings conference call, held on Friday, Oct. 25. During the call, Dean A. Scarborough, Avery Dennison's chairman, president and CEO, noted that while RFID revenue is slated to grow by 20 percent for the full year, compared with that of 2012, it increased by only 6 percent during the third quarter of 2013, relative to Q3 2012. This, he explained, was due to an extremely large sale to a North American retailer in Q3 2012 that was not repeated in 2013.
"I'm very pleased with the gains we're seeing in RFID," Scarborough said. "We're targeting continued strong growth for this $100 million part of the business over the next few years. The value proposition here is all about inventory management. Retailers are seeing good ROIs from their RFID implementations, and we remain the leading provider in the apparel space, by combining the best-performing products with an in-depth understanding of the use case—that is, understanding exactly how our customers can maximize the return on investment in equipment and consumable products. We're currently working on new rollouts for significant expansions of existing programs with seven major retailers across multiple market segments."
Scarborough noted that Retail Branding and Information Solutions (RBIS), Avery Dennison's division that provides RFID tags and services, experienced "some slowdown in the rate of orders for certain segments in the U.S.-based retailers, especially. I would characterize the department store segment and the mass-merchandising segment as being softer than we expected. But we still had good performance in fast fashion, as well as the performance athletic segments of the market. So for me, that was still relatively good news. We performed very well in Europe, actually, across most segments, and a number of RFID programs kicked in a little stronger than we had thought."
When asked what the full-year growth for 2013 would have been had Avery Dennison stripped out the impact of that major customer from 2012's revenue, Scarborough said the company's RFID revenue for 2013 would show an 80 percent increase over that of 2012.
"We've had several years in a row now of double-digit growth," Scarborough explained. "I'm going to say 20 percent, 30 percent, is a good average to take over the next few years—that could be on the low end, frankly. We just don't know. But I do feel like this: It's not an 'if RFID is going to happen'—it's 'how fast and what's the rate of adoption going to be.' So I have a high level of confidence that this is going to be a great business for the future."
When asked for additional details regarding the seven major retailers planning new rollouts, whether those firms are using RFID to track both low- and high-priced apparel, and the ROI case for these deployments, Scarborough said there were three important factors that retailers consider.
"One is the price. That's actually not the most important," he responded. "The other one has to do with complexity of the SKU [stock-keeping unit] sets, so think about things like shoes or intimate apparel or jeans, where you have an enormous variety of SKUs that are kind of hard to track. And then replenishment rate. Those three—we actually have a formula, which I won't share, to help retailers understand—are the key factors. What we find that happens, though, is retailers tend to start in certain departments, they get the ROI, and then they get some other incremental benefits in other areas as they move forward. And we've had one major retailer just going wall-to-wall because once [they] started to tag 60 percent, 70 percent of items overall, the retailer is saying, 'Well, I have such good inventory control now; incrementally, that extra cost isn't going to be bad.'"
Near the end of the conference call, Scarborough was asked if RFID patent trolls have had any effect on RFID sales, by causing retailers to throttle back adoption due to fears of being sued (see Companies Back U.S. Bills to Fight 'Patent Trolls'). "Well, certainly, it hasn't in Europe, because it's not particularly relevant there," he replied. "But I think these things tend to get resolved over time, and I anticipate that this won't be an issue for the long run.
