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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, 2008—This 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.
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:
"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.
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