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Make Money From RFID

Posted: Apr 02, 2009 12:19 PM by Will Ashworth

Tickers in this Article: KR, SWY, ROP, TYC, DHR, MSFT, MWV, MOT, JWN, KSS, APP

My wife works in retail, and she'll be the first to tell you that inventory management is a huge part of the customer experience. If a retailer doesn't have inventory under control, it costs them money, both in terms of lost sales due to product shortages and deep discounts to eliminate out-dated merchandise.

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Every penny counts, and the solution for most if not all merchants should be radio frequency identification (RFID). Retailers attach little tags to individual items, either at the point-of-manufacturing or before hitting the sales floor, allowing retailers to track inventory, saving them time and money. This or some other form of electronic identification will be the norm in five years and investors can benefit in several different ways.

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A Big Market Getting Bigger
In 2009, RFID-related businesses will generate $5.6 billion from hardware, software and service revenue. Unfortunately, growth is slowing due to a poor economy. The end-user activity in the first couple of quarters will give a better indication of the level of near-term growth for RFID. Given the technology is a cost-saver, it should be attractive to retailers of all sizes and not just the large chains. I'd look to the second half of 2009 or even into 2010 for real sustained growth.

While RFID adoption is finally gaining traction in the retail industry, it's strange that it took so long for inventory intensive businesses to buy into the technology. Those on board early should bear fruit soon enough.

Retailers Testing the Technology
American Apparel (AMEX:APP) is an RFID innovator and is leading the charge to better inventory management, currently operating a pilot project in seven New York City stores and one in Santa Monica. At present, American Apparel attaches the RFID tags to clothing at the store level. The next step will be to attach the tags at its Los Angeles plant, prior to shipping the clothes to the stores. AAP has found that going from tracking case and pallet tags to individual items has meant achieving 99% inventory accuracy. Its Santa Monica store increased sales 15% in the week after starting the pilot project and it was able to reduce labor costs by 60 hours a week. That helps both the top line and bottom line.

A University of Arkansas study found retail stores in the U.S. have 65% inventory accuracy. This kills sales when shelves aren't properly replenished. Before RFID came along, it took German department store Karstadt four days to re-price items when putting them on sale at the end of a season. Now it takes two hours. The cost savings are too large to ignore. Investors might want to check department stores like Kohl's (NYSE:KSS) and Nordstrom's (NYSE:JWN) to see what they're doing in inventory management. (Learn how to use revenue and expenses, among other factors, to break down and analyze a company, see Understanding The Income Statement.)

Someone Has to Make It
American Apparel uses hardware from Motorola (NYSE:MOT), MeadWestvaco's (NYSE:MWV), Microsoft (Nasdaq:MSFT) and others to make its RFID project a success. Other large companies in the RFID business, either directly or indirectly, include Danaher Corporation (NYSE:DHR), Tyco International (NYSE:TYC) and Roper Industries (NYSE:ROP). Then there are smaller tech start-ups like San Jose-based Altierre Corporation, which developed an electronic shelf label (ESL) that allows prices to be changed automatically, using RFID-based LCD displays.

Two grocery chains are also currently experimenting with the system. The paper savings alone are huge, not to mention the time saved as grocery chains typically make 10,000 to 12,000 price changes weekly.

Bottom Line
The RFID opportunity includes investing in those retailers using the technology, manufacturers providing it and even private companies going public sometime in the future. Keep an eye on RFID because sparks are going to fly. (Learn more in Analyzing Retail Stocks.)

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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