Retailers reaping RFID cost savings at suppliers' expense

The rollout of controversial barcode-replacement RFID tracking chips is set to be hit by delays because of a power battle between retailers and suppliers about who pays for the technology.

Retail firms can expect returns on investment of up to 187 per cent by using RFID technology but suppliers will be left to bear the brunt of the current high cost of transponders attached to goods at the beginning of the supply chain, according to new research.

The report, Saving Cash: RFID - What does it bring to the table?, by German research company Soreon looks at the costs and savings of fictional 'model' RFID implementations based on interviews with more than 40 end users and providers.

A €90,000 RFID project at a department store with 30 per cent of its 50,000 products initially tagged at item level would achieve ROI of 187 per cent and payback within a year, while a supermarket with 15 per cent of its 70,000 products tagged at item level would get 60 per cent ROI on an outlay of €90,000, the report said.

Key to those savings is item-level tagging as opposed to just pallets and crates in the warehouse and distribution centres. Steffen Binder, research director at Soreon, said that is where the big savings are.

"The biggest cost reduction is the point-of-sale implementation. You have cashiers who have to type in manually or scan individual items, inventory control is done manually. There is a lot of manpower around the store and it is taking up a lot of time and human resource," he said.

But the snag in the equation is that the returns are not quite so healthy for manufacturers, suppliers and logistics companies further down the supply chain. It is a problem that has tripped up Wal-Mart's rollout, with the retail giant struggling to get its suppliers on board.

Binder told silicon.com that suppliers currently pay the full cost of the RFID transmission transponders and that this cost could be passed on to consumers. At €50 cents per transponder, the cost of rolling out RFID for the manufacturer could be as high as €12.7m with a negative ROI of 63 per cent over three years.

"Suppliers are footing the bill for RFID," he said. "We suspect the discussion around who is really paying is the main cause of delays."

The cost of transponders is falling, but they will have to come down to below 5 € cents each before RFID is viable for suppliers, according to the research.

Binder said: "Two trends will help the likes of Wal-Mart, Tesco and Metro. Transponder prices are coming down. By the beginning of 2005, the big chains will be coming to grips with their suppliers. Then item tagging will follow."

The advice for retailers is to go full steam ahead with any RFID projects but suppliers are being told to delay until transponder prices fall or come to price-sharing agreements with supermarkets and stores.

"From their perspective, RFID is not an investment that will pay off reasonably in the near future," said Binder.