Calculating the Benefits of RFID

By Mark Roberti

Apparel retailers have a tool to determine the potential return on investment.

While a growing number of retailers understand that RFID can improve inventory accuracy, there are still many misconceptions about deploying the technology. RFID Journal's Apparel Retail ROI Calculator can help address them. The calculator is a tool that enables a retailer to get an estimate of how much RFID might cost, and how much return a company might achieve on that investment.

Many retailers, for example, believe tag costs are too high, but the calculator tells a different story. We've used a tag cost of 12 U.S. cents. We created a fictional company, XYZ Apparel, which operates 400 stores, each containing 10,000 items on the floor and 5,000 in the back room. The average selling price of the items is $30, with a margin of 52 percent. Each store does five inventory turns annually. Revenue is $2.25 million per store and $900 million for the chain.

The net benefit for XYZ Apparel, after factoring in the one-time cost of the RFID system and the recurring cost of tags and maintenance, is $30,000 in additional profit in year one, $58,000 in year two and $63,000 in year three. The chainwide benefit in year three is roughly $25 million. If you plug in a tag cost of 24 cents (for adding an RFID inlay to an existing label or hang tag), profit per store drops to $23,500 in year one, $51,000 in year two and $55,000 in year three. The chainwide benefit in year three is $22 million. So doubling the tag costs reduces the very significant contribution to the bottom line by just 11 percent in year three.

Another misconception is that RFID is merely a tool to help store managers ensure that when an item is sold, it is quickly restocked. Since some retailers sell fashion items and do not restock them, they think RFID is of no use. The truth is that RFID is about selling more goods at or near full price, because every item is in the right place at the time the customer wants to buy it. The calculator attributes just a 1 percent increase in revenue from incremental sales due to better replenishment.

The calculator also addresses labor costs and internal shrinkage. Retailers can download the Apparel Retail ROI Calculator for free here. Then, they can plug in their own numbers to estimate the potential benefit RFID will deliver.