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Did Wal-Mart love RFID to death?

Did Wal-Mart love RFID to death?

Posting in Technology

A decade ago, retailer Wal-Mart put its corporate weight behind RFID technology. In doing so, it almost killed it. Will it ever recover?

On June 11, 2003, those with a stake in radio-frequency identification technology enjoyed an early Christmas.

At 8:30 that morning, before a packed house at the Retail Systems Conference in Chicago, Wal-Mart CIO Linda Dillman announced that the world's largest retailer would require its top 100 suppliers to tag pallets and cases of goods with radio-frequency identification (RFID) tags.

RFID promised fast tracking of anything -- boxes, tools, cars -- through a radio-wave-emitting tag and a nearby reader. For Wal-Mart, it held the promise of a more efficient supply chain, something of vital importance to a company with $250 billion in sales that year.

When Wal-Mart speaks, the rest of the business world wishes it had bigger ears. So for many in the worlds of media, investing and information technology, RFID quickly went from a relatively little-known and little-understood technology to the next big thing.

They couldn't have been more wrong.

OLD TECHNOLOGY, NEW MARKETS

At the time of Wal-Mart's announcement, the use of radio waves to transmit information was ubiquitous, used in everything from air traffic control to baby monitors. But its development as a business process tool was still in its relative infancy.

In 1999, researchers at Massachusetts Institute of Technology joined with industry giants like Procter and Gamble and Gillette to establish an Auto-ID Center at the university. The term "Auto ID" referred to a broad range of existing and future technologies able to track goods, people and information.

The group's early work, to which Wal-Mart contributed, focused on developing an RFID-based electronic product code, or EPC. The electronic code would allow businesses to track shipments and inventory automatically through a system of tags and sensors. It was a potential replacement for the manual scanning of bar codes, a technology that itself revolutionized retail two decades earlier.

But given the nearly non-existent cost of bar codes relative to RFID, several in the industry said, the EPC was a solution in search of a problem.

And when Wal-Mart made its announcement (the Department of Defense also announced an RFID initiative around the same time), the technology showed promise -- but had yet to fully mature. "In 2003, this was the magical device that would read anything, anytime," said Bill Hardgrave, who ran the Arkansas-based RFID Research Center until 2010 before leaving to become dean of the business school at Auburn University.  "The fact of the matter is, these are radio waves that don't go through metal and get diffused by water. One of the early lessons was that you have to know how to use the technologies."

It didn't help that RFID had yet to be fully implemented in an unpredictable and "noisy" -- at least from a radio-wave perspective -- real-world setting like a retail supply chain.

Still, Wal-Mart viewed RFID as a means to further enhance its much-envied logistical prowess. Those in the field expected adoption to ultimately be "narrow and deep," primarily in the area of supply chain management.

Today, they say, the opposite has happened. "It is being used in every single industry that you can imagine and used in probably in every country on earth," said Marc Roberti, founder and editor of the trade magazine RFID Journal.

But it has yet to penetrate any of them deep enough to scale the market as envisioned nearly a decade ago, when the retail giant stepped in and brought with it dreams of a next-generation gold rush.

RIDING THE WAVE

"All Fired Up Over RFID," read one headline in July 2003. Forrester Research quickly released a report titled "Wal-Mart's RFID Endorsment: The Tipping Point." Pete Abell, at the time an analyst with AMR Research in Boston, told tech website CNET, "I imagine there will be a rush on investing in RFID." He predicted that spending would be "bigger ... than Y2K," for which U.S. businesses alone spent an estimated $100 billion.

Then came whiz-bang stories of refrigerators that could one day tell you when the milk expired. An IBM commercial produced at the time was typical:

An ominous looking guy in a Duster stuffs groceries in his pockets as he stalks the store aisles. Nearing the exit, he passes through an archway resembling an airport X-ray machine. A scowling security guard stops him. "Forgot your receipt," the guard says, breaking into a smile.

The frenzy wasn't lost on Wal-Mart's Dillman. In 2004, InformationWeek magazine asked her, "How does it feel to know that you have the influence to change the world with your decision to use RFID technology?"

"It's frightening," she replied, adding, "The coverage caught us by surprise. We didn't think it would get the kind of press it did." (Wal-Mart declined to comment for this article. Dillman, now CIO at QVC, did not respond to requests for comment).

Yet Wal-Mart's stated intentions did little to temper the enthusiasm. "By 2006, we will roll it out with all suppliers," company spokesman Tom Williams told Roberti in the summer of 2003. It also spent an undisclosed sum to support the opening of the RFID Research Center in nearby Fayetteville, Ark., in 2005, and has been a major donor ever since.

It's one thing, however, for a company to spend its own money on an unproven technology with an unproven return on investment. It's quite another to force other companies to do so, even when the company doing the pushing is as big and powerful as Wal-Mart.

CULTURE WARS

To be fair, the retailer itself never claimed that RFID would change the world. But by foisting it upon its suppliers, it certainly changed their world.

First, there was the cost. Many consumer products like toilet paper and laundry detergent have razor-thin margins. Requiring tags (which were then estimated to cost anywhere between 50 cents and more than a dollar) on every pallet and case could mean the difference between profit and loss. Then there was the added cost of maintaining two inventory streams -- one for Wal-Mart and one for everyone else -- and back-end systems to collect and process the prodigious data streaming from the tag readers.

Several in the industry likened RFID to technology like fax machines: it only becomes financially viable once everyone uses it. But the so-called network effect never materialized. "[Wal-Mart] thought, ‘If we do this, other retailers will follow on and that will create a critical mass, so all the suppliers will be forced to do it," Roberti said. "The biggest issue is that the industry didn't go along."

The technology posed a particular threat to the suppliers' IT departments and managers, the very people who would oversee its implementation. They were the ones who had lobbied for and implemented the legacy systems then in place.

"You have to piss on someone's business model to do it right," said Doug Standley, a technology innovation strategist at Deloitte who worked with the Arkansas research center.

Hardgrave added: "The retailers involved, the researchers, the standard organizations like EPCGlobal, I think we all underestimated those issues. I think we underestimated the legacy part of it. I think we underestimated the appetite for this as a process enabler."

BEWARE: TROUGH AHEAD

For a short time, the early cheerleaders were vindicated. Following Wal-Mart's announcement, sales of the type of "passive" ultra-high frequency tags used by the company rose from 2 million units in 2003 to 120 million in 2005, according to research firm ABI(CK). Revenue rose from $1 million to $20 million.

But the rapid growth was ephemeral, and the broader RFID boom never materialized. Even before the start of the 2008 financial crisis, which undoubtedly crimped sales, the market for passive tags had only grown to 150 million units and revenue was flat.

Not only hadn't adoption spread quickly to other retailers and suppliers, Wal-Mart faced its own issues with implementation, including pushback from suppliers and technical problems. In the early days, the company's database wasn't big enough to handle the volume of data generated by the new system. By late 2005, its ambitions had already been scaled back. Wal-Mart announced that the "next 300" of its top suppliers would begin tagging by 2007-- a far cry from the full compliance the company spokesman had touted just two years earlier.

Of course, unforeseen problems with new technology are no surprise; it's how processes are refined. But given Wal-Mart's visibility and the early hype, anything less than success was seen as a failure.

RFID was about to enter "the trough of disillusionment," a phrase coined by technology research firm Gartner to describe the "hype cycle" of new technology. In Gartner's analysis, a trough follows a "peak of inflated expectations," and given Wal-Mart's outspoken support, RFID had a long way to fall.

"There's no doubt it was way overhyped," Hardgrave said. "It just about killed RFID. The trough was so deep that it almost stopped in its tracks."

Roberti of RFID Journal said the industry was largely kept alive by retailers, who were finding some success in tagging individual items. Still, the losses for RFID manufacturers and investors piled up.

"They saw all this hype and poured in a lot of money," he said. "A lot of these companies burned. Revis Systems used to be one of biggest spenders. They're now gone." Many of the survivors subsisted, hoping for a surge in demand that may never come.

Mike Poldino, vice president and general manager of the RFID division at industry-leading Motorola, said: "People got lazy. [RFID] is not a panacea. You really have to think carefully. They learned that they had the wrong use case."

CHICKEN, MEET EGG

Nonetheless, for Wal-Mart and others, the RFID initiative was far from a total loss. Indeed, nearly all interviewed for this article say the company's involvement pushed the technology forward. The "trough of disillusionment" may not have been as deep without Wal-Mart, but the technology might be much less mature and the industry might still be waiting for a savior.

"Hats off to Wal-Mart," said Carlo Nizam, who oversees the RFID efforts at Airbus, the aircraft manufacturer. "What they did was very ambitious, and things in RFID wouldn't be where they are today without Wal-Mart and the [Department of Defense]. They really spurred and stimulated it."

Nizam should know. He's helped implement RFID across Airbus and other businesses owned by its parent company, EADS. Radio-frequency tags, it turned out, were exactly what the company needed to track and streamline a manufacturing process that took place all over the globe.

"To improve a process, you need to know how it's working," he said. "More often the information is scarce or inadequate. It's on paper and manual. Technologies like RFID are all about improving visibility."

At Airbus, Nizam and his colleagues have implemented tagging throughout the manufacturing process. "Today we build the A830 in different assembly sites, so what did we do? We put RFID on aircraft subassemblies in the plants, and sensors all over the world. We saw what sections were where, and for how long. Then we judged that against how we wanted it to be done.

"At each station, you can drill down. I can see assembly time on every wing being manufactured. If one is taking too long, why? Am I seeing a trend, or is it a statistical anomaly?"

For Wal-Mart, all of its work in RFID led it to an unexpected conclusion. While it continues to use it as a supply chain tool, the company realized that RFID might be best used inside stores, where maintaining the right inventory mix can mean the difference between a sale or no sale.

For instance, a shelf may look full of shirts, but what if they are only in sizes small and extra large? RFID can help scan a shelf without the costly and tedious hand sorting of merchandise or bar code scanning.

In 2010, Wal-Mart began tagging underwear and denim in its stores, with a bigger rollout planned. Other retailers such as Macy's and Bloomingdale's have followed.

Department store Lord & Taylor recently tested RFID in shoe departments at six locations. With something like shoes, it's critical that all available styles are on the showroom floor. If one isn't -- for example, if a floor model was sold -- then the entire inventory of that shoe will never be sold. RFID is an automated way to address such concerns. The company reported a "strong increase in sales" since beginning the trial in May, but declined to release specific numbers.

AN UNCERTAIN FUTURE

With the U.S. economy slowly recovering and retailers beginning to step back into the market, will RFID fully emerge from Gartner's trough and find fortune in the next stages, the "slope of enlightenment" and "plateau of productivity?"

Standley of Deloitte is skeptical. Aside from the early hype spurred by Wal-Mart's entry, Standley said it has suffered from a particular bias--that of a stand-alone technology geared toward supply chain management and inventory control. He says that until RFID is viewed as part of, and incorporated into, systems that use the range of auto-identification tools--like NFC, or near-field communication, a radio-frequency technology used to power the smartphone-based electronic wallet service being offered by Google Inc.--the return on investment just isn't there for many businesses. And he points to a particular lack of maturity in software to power the type of integrated system he describes.

"You can't take RFID by itself," said George Kraev, an analyst at research firm ABI. "Wal-Mart has made a lot of statements that there need to be business process changes that need to be done to make RFID work. At the moment, there is no way. At the moment, you have UHF supply chain tags that use one frequency and NFC that uses another."

Yet there is room for optimism. "In the future, we'll see expansion in retail, and we'll see more tagging on consumer goods," Kraev said. "As the implementation cost goes down, large retailers can tag more goods and manage inventory." The research firm predicts unit sales of passive readers to hit 250 million this year, rising to 445 million by 2016.

Perhaps John Williams, an MIT professor and board member at the Auto-ID Lab, does the best job of describing the past and future of RFID. "To some extent, you probably need that hype at the beginning. We had it with getting rid of paper -- everything would be electronic. It didn't quite happen that fast. Xerox is still in business. But guess what? Now we're not printing very much out.

"It's almost like all start-ups: they have to very optimistic. It's like Facebook. You'd say these guys are crazy. You're never going to have a $10 billion business just with people keeping track of friends."

On Feb. 2, the popular social network filed for its much-anticipated initial public offering. Its potential value: more than $75 billion.

Photo: Based on original by Tim.

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Matthew Malone

Contributing Writer

Contributing Writer Matthew Malone is the editor-at-large of Aspen Magazine. Formerly, he was a staff reporter at Conde Nast Portfolio. He has written for The New York Times, Cosmopolitan, Smartmoney.com, Fortune.com and Forbes.com. He holds degrees from Columbia University's Graduate School of Journalism. He is based in Connecticut. Follow him on Twitter. Disclosure