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Are RFID's Benefits to Apparel Retailers Real or Hype?

Many CEOs are skeptical, but here's why retailers have used the technology to achieve an increase in profit of 5 percent or more.
By Mark Roberti
Aug 10, 2009When RFID Journal and others write about using radio frequency identification to track clothing items in retail stores, we often say the technology can lead to an increase in sales of 5 percent to 10 percent. American Apparel, in fact, has reported a whopping 14 percent increase from RFID (see American Apparel RFID Project Featured in Video and American Apparel Expands RFID to Additional Stores). CEOs at retail chains seem to dismiss this as so much hype, but the reality is that not only can RFID can boost sales by 5 percent or more, most or all of that revenue increase flows to the bottom line.

I just heard CEOs collectively sigh, "Yeah, right," so allow me to explain.

We have all had the experience of walking into an apparel or department store looking to purchase a pair of jeans or kakis, only to walk out without finding our specific size. So we head on over to the next store and pick the item up there, even if it costs a few dollars more. The original retailer probably had the item in its store or distribution center, but poor execution led to a lost sale. The result, too often, is that the retailer then has to mark the item down and accept a lower profit margin.

When you think about it, this scenario plays out most often on hot items or seasonal products. As Zander Livingston, American Apparel's director of RFID, says, "When you are at your busiest, manual processes break down." Staff members are overwhelmed and can't replenish. But RFID enables retailers to achieve much greater inventory visibility, so managers can see which items are moving quickly, and which are out of stock or soon going to be. And because RFID systems enable you to confirm that items that need to be replenished have, in fact, been replenished, store managers can easily make sure that processes are being followed—even when the store is at its busiest.

Because RFID helps ensure that items are on the shelf when customers want to buy them, a retailer sells more items at or near full price. Since companies have already paid for and shipped inventory to the store, the additional revenue is all profit. Marshall Kay, founder of RFID Sherpas, wrote an excellent article for Apparel magazine a few years back that illustrated this point (see RFID: Well Within Reach). I've adapted his explanation in the chart below, which illustrates two scenarios in which a retailer sells sweaters that cost $40 for a list price of $100—with and without RFID.

Click here to view a larger version of the chart.

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