RFID Tempts, but Opportunity's Elusive

Technophiles often tout RFID, or radio frequency identification, as the driver of the next revolution in the retail industry. But just when this revolution will sweep the industry -- and which vendors will benefit -- remains an open question.

"It's not 'if' anymore," Lyle Ginsburg, managing partner for technology innovation in Accenture's Global Products Operating Group, says of RFID, a World War II era technology that can help stores better track their inventory. But Ginsburg likens the current stage of RFID adoption to the start of a marathon: "It's going to be painful until you get your rhythm or routine down."

Understandably, many investors are struggling to find their stride as the potential RFID benefit is priced into names such as Zebra Technologies, whose stock is trading at about 31 times forward earnings and 7 times sales, and Manhattan Associates(MANH Quote), a firm with a checkered past now trading at nearly 25 times forward earnings.

Meanwhile, RFID revenue remains relatively minuscule at the largest hardware companies such as Texas Instruments and Philips Electronics. In addition, a handful of interrelated hurdles -- standards, performance and price -- remain an issue for all RFID-related ventures.

Investing now in RFID is like asking how to make money on Y2K in 1994, warns Scott Lundstrum, a senior vice president and chief technology officer of AMR Research. "You can see the money out there, but you just can't get it yet."

Hype and Hope

The major reason for all the hype, of course, is a mandate from Wal-Mart requiring its top 100 suppliers to use RFID tags by January 2005 for merchandise destined for stores in Texas. Similar mandates have been issued by the Department of Defense, Target , Albertson's and Tesco, the largest retailer in the U.K.

The hope is that RFID tags, which store product information much like a bar code, will help these entities track inventory better. The tag is a small microchip that can store more specific details about a product than a bar code and even be updated to follow a product's movement through the supply chain. Unlike bar codes, an RFID tag does not have to be directly in sight of a scanner to be read.