RFID for Small and Midsize Retailers

By Mark Roberti

Even companies with a single store can benefit from using radio frequency identification technologies.

I speak at lot events about the use of radio frequency identification in retail, as well as in other sectors, and I am often asked if the technology is just for large retailers with many stores. The answer is unequivocally "no."

This weekend, I was reminded once again of how badly some small retailers need RFID. On Sunday, I dropped my youngest son off at Stevens Institute of Technology, where he will be studying engineering (my older boy graduated last May from Worcester Polytechic Institute with a degree in mechanical engineering).

We're very proud of our son, so I wanted to buy a polo shirt with the Stevens name on it. My family found the campus book store and I started looking at shirts. I found a style I liked. There were about 10 left on the rack. Eight of the ten were size small and two were extra-larges. I wear a medium, so I looked at another shirt I liked. Again, there were about 10 or 12 shirts on the rack, but no mediums (or larges, in this case). I looked at a third and a fourth before finally finding a shirt that fit me. I didn't like the style as much as the first two, but I wanted to show my support for my son, so I plunked down $20 and bought it.

My son was going to preorientation. Most students will arrive on campus this Wednesday. Here is a store with about 5,000 items on the floor, and it had all summer to prepare for the big rush that would be coming as parents brought their children to school for the first time. I suspect this is probably the biggest sales period of the year—with the possible exception of before when students head home for Christmas—and it did not have the most common sizes of popular items in stock. Poor inventory management will undoubtedly cost this store a lot of money this week, as not all parents will settle, as I did.

The biggest challenge for small stores is tagging all new items that come in. That would have to be done manually in the back of the store or in a warehouse, if it has one. The store could purchase tags for about 10 cents apiece, buy a handheld passive UHF RFID sled reader for about $1,000 and use cloud-based software. The solution could cost $10,000 to $12,000 in total, not including labor for tagging.

I'm pretty sure the store would make more than that in additional sales margin using such a solution. Why? Because RFID could ensure that the right sizes are always on the shelf and reduce the number of people who walk away without buying anything.

Here is a quick, back-of-the-envelope calculation. Let's say there are 5,000 items at the store, with an average selling price of $25 apiece, and the store does five inventory turns per year. That means it makes about $625,000 in revenue (5,000 items times $25 times five turns). Let's say the margin on the items averages 50 percent. That's $312,500 in profit. If sales go up 4 percent annually due to improved inventory accuracy, that amounts to $12,500 in additional revenue during the first year. There is an ongoing cost for tags and the software, but the readers are paid off in the first year. As such, any additional sales lift constitutes a return on investment.

The question is this: Will sales go up 4 percent? I believe that's a conservative estimate. Consumers either do not buy an item or purchase it at another store about 40 percent of the time, according to a study conducted by Thomas W. Gruen of the University of Colorado at Colorado Springs, and Dr. Daniel Corsten of the Business School Madrid (see A Comprehensive Guide To Retail Out-of-Stock Reduction In the Fast-Moving Consumer Goods Industry). Retailers that use RFID never report the uplift in sales they achieve, but privately, many have told me that their store sales often increase by more than 10 percent.

For retailers both small and large, inventory management is a huge headache. RFID can simplify it by enabling you to count 7,000 items per hour, versus about only 200 with bar codes. Weekly inventory counts can boost inventory accuracy to better than 95 percent, which means customers will find what they are looking for—and buy it. Isn't that what retailing is all about?

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.