How RFID Could Save Retailers $42 Billion Annually

By Mark Roberti

A new study shows retailers lost $128 billion globally to theft, fraud and administrative error, but radio frequency identification technology could reduce that amount by as much as 40 percent.

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For each of the past 13 years, Checkpoint Systems has sponsored a study of shrinkage titled “The Global Retail Theft Barometer.” While shrinkage declined from 1.36 percent of sales from January to December 2012 to 1.29% of sales during the following 12 months, it still accounted for $128 billion globally in losses for retailers. RFID could reduce that amount by as much as 40 percent.

Before I get into how RFID could do that, let me provide a little background. Shrinkage, or “shrink,” is defined as the difference between the revenue a retailer should have received and the actual amount received. It takes into account shoplifting, employee theft, vendor fraud and administrative error. The Global Retail Theft Barometer has been an invaluable gauge of this problem.

The study was conducted in 24 countries throughout North America, Latin America, Europe and the Asia-Pacific region, and it covers supermarkets, gas stations, convenience stores, warehouse clubs and pharmacies, as well as department, home improvement, discount, jewelry, sporting good, pet food, toy, apparel and other stores. The Smart Cube, a research firm, conducted an online survey with loss-prevention managers to gain insights into the amount of shrinkage they suffered. In-depth interviews with some of the respondents, as well as other retail industry experts, were also conducted to gain qualitative information regarding the challenges faced by retailers, the level of focus on shrinkage management, and the reasons for commissioning or not commissioning loss-prevention solutions.

The shrink rate was highest in North America, with retailers losing, on average, 1.48 percent of sales. In Latin America, the rate was 1.41 percent, followed by 1.28 percent in Asia-Pacific and 1.13 percent in Europe. Mexico topped all countries with a rate of 1.70 percent, followed by China (1.53 percent) and the United States (1.48 percent). Norway (0.83 percent), Japan (0.97 percent) and the United Kingdom (0.97 percent) had the lowest rates.

Radio frequency identification technology can’t eliminate shrinkage (no technology can), but it can certainly help reduce it. American Apparel found, after deploying RFID on all items within its stores, that internal shrinkage declined by an average of 55 percent. At some stores, it fell by as much as 75 percent. Former CIO Stacey Shulman attributed this decrease to the reduction of process errors, as well as a change in American Apparel’s culture. By tracking each item, American Apparel reminds employees that each item has value, so they are less likely to take something without paying for it (see RFID Delivers Unexpected Benefits at American Apparel).

Now, let’s do the math. The Global Retail Theft Barometer says employee theft accounts for 28 percent of retail shrinkage globally. Twenty-eight percent of $128 billion is roughly $36 billion. Let’s say RFID cuts that amount in half. That would be $18 billion in additional revenue for retailers.

The report also says administrative error accounts for 21 percent of shrinkage. That’s equivalent to $27 billion. I have not seen any studies about RFID’s impact on administrative error, but given its ability to count items quickly and accurately, I would say it could reduce errors by 80 percent (or better). That would be a savings of $21 billion.

Vendor fraud accounted for 13 percent of all shrinkage last year, or $16.6 billion. An example of such fraud would be a vendor saying it shipped 1,000 items, but really only shipping 950. Again, RFID’s ability to count quickly and accurately should be able to reduce fraud by 80 percent, saving retailers another $13 billion.

Total it all up, and it looks like RFID would save the retail industry approximately $52 billion annually. I don’t know how many items are sold on an annual basis, but let’s say it’s 1 trillion. Tagging all of those goods would cost roughly $10 billion if the tag cost were 10 cents apiece (it would likely be less if 1 trillion transponders were being consumed each year). The $42 billion in savings from the first year of using RFID would pay for all the hardware, and then retailers would save $42 billion annually.

That’s a lot of money. Of course, that savings would not be split equally among all retailers. Shrink varies greatly, depending on the region of operations, whether a retailer tries to combat it aggressively, the use of technology and other factors. But the bottom line is retailers that deploy RFID to manage inventory are likely to get a big return on investment from improving on-shelf availability—and the reduction in shrinkage will be a pleasant additional benefit.

Mark Roberti is the founder and editor of RFID Journal. If you would like to comment on this article, click on the link below. To read more of Mark’s opinions, visit the RFID Journal Blog, the Editor’s Note archive or RFID Connect.