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Report: RFID Not Economically Justified for Retailers

AMR Research has released a report that comes at the topic of ROI from the perspective of the retailer. Its conclusions are sobering.
Tags: Retail
Oct 07, 2005This article was originally published by RFID Update.

October 7, 2005—Return on investment is one of the central themes discussed today by those involved in RFID deployments. Typically, the focus is on ROI from the supplier perspective. AMR Research has released a report entitled RFID and Retail: Little Return for Case and Pallet Tagging that comes at the topic from the other side, that of the retailer. Its conclusions are sobering.

According to the Boston-based research firm, "For fast-moving consumer goods retailers, an enterprise-wide investment in RFID technology based on case and pallet tagging won't generate enough revenue to significantly add to the bottom line." That is, from an economic perspective, wide-scale RFID simply isn't worth it for retailers.

To arrive at this conclusion, AMR Research devised a model with variable inputs that could be tweaked to accommodate the diversity of real-world retail enterprises. Among inputs related to out-of-stocks, labor savings, and percentage of goods tagged, the model assumes a hypothetical retailer with $5 billion in annual sales, an operating margin of 3.25%, 8 distribution centers, and 200 stores. The full rollout occurs over the course of three years. Given this setup, AMR calculated that the entire RFID deployment would cost $39 million, an expense impossible to adequately recuperate from the investment. "Even RFID boosters will have to admit that there are plenty of other potential uses for the $39M in capital that are more likely to deliver a significant bottom-line impact, including those technologies more focused on direct profit improvement, including pricing and promotion systems, category management workflows, and retail workforce management applications."

Despite this damning conclusion, AMR is quick to note benefits that RFID provides which are not as readily quantifiable according to traditional ROI models. Targeted tagging of high-value goods, for example, can yield profits. Tracking promotions is another example. And then there are the "soft benefits" of RFID, such as granular demand data, shrinkage reduction, and the possibility for enhancing the consumer shopping experience through the use of novel RFID applications like interactive displays.

AMR ultimately argues that the justification for deploying RFID rests not in near-term ROI but in long-term competitive edge. The window onto the supply chain that RFID can deliver will bring about the realization of the demand-driven supply network (DDSN), a veritable holy grail of efficiency for retailers. Thus, says the report, "The best justification for the multimillion-dollar [RFID rollout] expense is to lay the foundation for creating and acting on real-time demand signals that RFID technology will create." It continues, "By investing in RFID across the entire enterprise, early adopters can gain needed experience, technology, and organization skills to operate in tomorrow's environment."

The full report available here to AMR clients
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