By Paula Rosenblum, Managing Partner
6/24/2008
The announcement on Monday June 23, that Checkpoint is acquiring OatSystems brought back memories of the heady days of the hype cycle (I think that’s what Gartner calls it) of RFID technology. It has a personal closeness to my heart, as those were also the early days of my analyst career. We were encouraged to be thought leaders, and RFID was just about the only new game in town (apart from markdown optimization, which was an easy sell to someone like me). So, everyone had an opinion.
There was a time when RFID tags were going to be, depending on your point of view, the solution to all the world’s problems or a sure sign of the end of days, with the government acquiring the ability to monitor everything from what we buy and eat to where we walk and talk. Back in those heady Wal-Mart mandate days, a few analysts sat scratching their heads. I was one of them. I kept asking myself questions like, “Do I really want my refrigerator to tell me when it’s time to buy more milk?” and “How much labor will having an RFID tag on cases and pallets really save over a bar-coded license plate?” Most importantly, “Do I want my local department store making helpful suggestions on how I might improve on the outfit I’m wearing when I arrive in the store?” In other words, I was skeptical. It was not “popular” opinion.
There was only one choice. Jump off the hype wagon and start thinking less like an analyst and more like a retailer. I was able to wrap my head a around a few things quickly:
· Merchandise Provenance – If you know general merchandise and apparel, the phrase “diverters” or “grey market” means something to you. You know it means that retailers or distributors take advantage of buying truckloads of merchandise on “special” and re-selling it at a profit to retailers that original manufacturers would rather not include in their brand image. So, for example, when you went to the now-departed Fayva Shoe Store and found a pair of Reeboks, you could be pretty well assured that product was purchased from a diverter. I could understand how Reebok might want to trace back the “chain of custody” to understand how that particular item ended up in such an undesirable location.
· Visibility in the Store – A unit of apparel and footwear is more than just a style. It’s a style, in a particular size, in a particular color. And it’s really easy for a product to get put on the wrong rack or a wrong shelf. Gap did some early tests around the “out of stock” issue, and found that much of the time (I seem to recall it was 47% or better) the seemingly out of stock merchandise was right in the store. Maybe it was in a dressing room. Perhaps it was on the wrong rack. Or maybe a customer was about to walk out with it in her handbag. Gap abandoned its test because the price of readers still was too high to gain full store coverage.
We know that diverters can cost brand managers some amount of money and definite loss of brand “caché.” No one likes to see genuine high-end goods at a flea market. And heaven knows, the retail industry has beaten the drum about out-of-stocks costing sales and irritating customers. But there’s this third thing… and it is the thousand pound gorilla in the room. Retailers spend a fortune in time and money taking physical inventories in their stores. The cost is not just to pay an outside service bureau to actually take them – there’s a ton of time and payroll associated with preparation, cut-offs and overall tidying up the store. Most of the time, while these inventories may achieve financial accuracy, at a sku level, the numbers are… lacking.
So, I’m taking off that analyst hat again, and thinking like a retailer. I remember the days when we used to close our distribution centers for 4 days at the end of the fiscal year so the auditors could supervise a full physical inventory of the DC. And I’m remembering how the advent of bar-code and locator systems gradually has reduced, if not eliminated completely the need for those full-fledged physicals. They’ve been replaced by cycle counts, which cause far less disruption and are ultimately more accurate. On any given day, retailers have a better idea what’s in their distribution centers than they did in the days of annual physical inventories.
What if we could replace those store physical inventories with cycle counts, too? And what if we could do it for pretty close to free? What if those same tags used to control theft in our stores could serve as license plates too? There’d be no significant up-charge… and with enough cycle counts, after a couple of years – NO MORE PHYSICAL INVENTORIES. Rather than attempting to blanket the store with RFID readers and antennae, why not have a store associate walk a few aisles, and scan merchandise into and out of the back room as well.
Suddenly the world of RFID gets interesting. I know Wal-Mart and Carrefour have achieved some kind of savings in their supply chains. I really don’t quite understand how or why, but I believe them. But this, I can see and touch and visualize. Just as I can see LP managers everywhere rejoicing over saying adios to outside physical inventory providers.
OatSystems provides Checkpoint with needed integrating software. It’s a logical match. Of course, Checkpoint and Oat are not the only game in town. Motorola and Tyco each have a stake in RFID for LP.
It’s important to note though that LP is pretty much a zero-sum game. You might nudge the shrink needle down a bit, but it’s not going to give you a lot on the top line. The more important question is “What’s left in stock?” “What do I have available for sale?” Sell one, and you pay for two. I’m really looking forward to the day when we can cycle count in stores and eschew those PI’s once and for all. From where I sit, as an analyst or a retailer, that would be real progress.
What do you think?
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