The news from Wal-Mart chief executive Lee Scott in August was not what the radio frequency identification (RFID) sector wanted to hear.
The retail giant’s second-quarter sales, while up 8.8 percent, had once again fallen short of expectations. Worse, because of a need to lower prices, the company was reducing its forecast for year-end earnings from continuing operations by 10 cents per share.
The tepid earnings report came at a time when the RFID industry was desperately hoping for a clear signal from Wal- Mart that the technology could produce benefits.
It had been four years since the largest US retailer embarked on an ambitious program to implement RFID technology throughout its operations, and so far there was seemingly little to show for it.
By placing RFID tags with embedded circuits and radio antennas on pallets, cases and even individual packages, Wal- Mart was supposed to be able to wring out inefficiencies in its massive logistics operations and slash out-of-stock incidents, thus boosting same-store sales.
Instead, Wal-Mart turned in a string of disappointing quarters, cost savings failed to materialize, and inventory levels rose rather than fell.
Inventory was up 4.8 % against a 6.5% growth in sales in the second quarter and an even worse 9% against a first-quarter 5.6% rise in sales. Those results fell far short of a corporate goal of keeping inventory growth to half that of sales, according to Eduardo Castro-Wright, head of Wal-Mart Stores USA.
Similarly, operating costs continued to climb, particularly in comparison with major rivals Target and Costco. General and administrative expenses rose to 18.4% of sales in 2006, compared with 17.9% in 2005.
The lack of any obvious concrete gains has raised questions as to whether Wal-Mart should delay or freeze its RFID plans.
For now, however, Wal-Mart says it will stay the course. At an RFID conference in May, CIO Rollin Ford insisted the technology is producing solid results in the company’s supply chain operations, including a 30% improvement in out-of-stock rates at stores where RFID has been deployed.
“I read we’re slowing down on RFID,” Ford said at the conference. “I can tell you nothing could be further from the truth.” Wal-Mart will RFID-enable another 400 stores this year, according to Ford.
Despite some support for the technology from consumers and key suppliers such as Procter & Gamble, Kimberly-Clark and Unilever, Wal-Mart is in the midst of dramatically reshaping its RFID strategy.
By January 2006 the company hoped to have as many as 12 of its roughly 130 distribution centers fully outfitted with RFID.
That effort stalled at just five distribution centers. Instead, the company is now focusing on implementing RFID in stores fed by those five distribution centers so it can gain a bigger window into its supply chain.
Suppliers have also been slow to jump on board. Four years after Wal-Mart announced its RFID plans, only about 600 of Wal-Mart’s 60,000-odd nationwide suppliers have gotten involved in the project.
Without widespread adoption, the cost of RFID tags, readers and supporting systems remains a barrier.
“We haven’t lost faith in the potential of the technology,” says Simon Langford, head of Wal-Mart’s RFID initiative. “But we have had to change our strategy to provide more benefits to our suppliers.”
Wal-Mart’s change of plan demonstrates the need for retailers and suppliers alike to tread carefully with RFID. As retailers such as Best Buy have observed, widespread adoption is still years, not months, away.
At the same time, some of the greatest benefits may not be in applications first thought to be ripe for the technology, such as automating distribution centers.
Instead, retailers are finding early gains closer to the sales floor, where they are using RFID to track consumer buying patterns and ensure products are on shelves in time for promotions.