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The essentials of ROI calculation in retail RFID

The challenge in the spread of RFID is mentioned by many to derive from the difficulty to predict the cost. This blog offers a view on what are the different elements of RFID investment and suggest an idea on how to evaluate cost using a fictional case.

The more I speak with retailers interested in RFID, the more I believe in one thing; The investment is not transparent enough for the retailers even though we have witnessed RFID tags introduced to products with average retail price of € 20,00 just as we've seen high-end, luxury products equipped with the technology. So in this blog I wish to shed some light on ROI calculation as well as to explain why many have stated the benefits of their RFID deployment have exceeded their expectations.

We learned from Uwe Quiede, a well-known and experienced RFID consultant that most retailers he consults can justify the investment in RFID with just 1% increase in sales. All else is just additional benefits. My discussions with some mid-sized North European retailers suggest that alone the time saved with inventory would be enough to finance the investment for them. 

In our example, even a mid-segment retailer will find ROI for RFID investment within a year. 

What are the elements of ROI calculation? 

The positive impact of RFID on businesses is typically based on the four themes introduced in the table below. 

ROI-article -Jessica -table -1

When turned into Euros, the above four will create the "plus" side of the calculation. As each retailer has different processes, all ROI calculators are just suggestive, but should at least help to list the elements that can be used as a basis for the ROI.

Usually it is relatively easy to determine the impact of increased transparency of stock. A well run and not too wide pilot project will give an understanding on how RFID can help to count stock more often. Typically the RFID ROI calculators are based on inventory accuracy as the other factors require more retailers' internal analysis and vary more from a company to another. However, there is no need why one couldn't add these factors to a ready calculator that mainly focuses on inventory accuracy and cost savings. As Kris Doane, the former "Mr RFID" at American Apparel points out in our interview with him, one of the main success factors of RFID projects is to include all departments in planning the RFID project and not to consider RFID from a mere logistics or IT point of view. For example the RFID Arena ROI calculator includes all these factors and leaves some of them open for the retailer to fill in on demand. 

Total costs

Investment:

1. Hardware (mobile & fixed readers, and potentially RFID printers and RFID based EAS)

2. Applications to support the chosen hardware 

  • Applications for fixed readers tend to be a bit more complex and hence are typically more expensive than those for mobile devices. This is why many try to use mobile devices for as many purposes as possible. Applications for mobile devices can be priced according to the amount of users or the amount of devices / licenses for instance. 

3. RFID database or extension to existing ERP (or equivalent) to support the use of RFID next to barcodes

  • At its simplest this can mean a separate database, which just combines existing information to RFID information, but in most cases a combination of existing database and RFID database or a completely new RFID-run database will be used.

4. Integration to business systems

5. Installations

Ongoing costs

On top of the investment itself come the ongoing costs.

The largest part of the ongoing costs is formed by the RFID tags. The good news is that the tag cost is still dropping. According to Apparel Magazine, the cost of tags has dropped within the past 24 months significantly in the US and is close to 0,10 Euros at the moment.

Furthermore the support for the system will form a cost. 

A concrete example

Let's imagine a retailer with 200 own stores. They currently sell roughly 12.5 million items per year at an average of € 25,00, making the yearly turnover € 312,5 million. Online trade currently represents 5% of the turnover and it is growing. The retailer knows that customers are lost online due to unavailability, but at this point online will not be added to ROI calculation, but only physical stores will be consider as they are all filled from one DC (operated by a business partner).

The ROI benefits for this retailer are described in the table below:

ROI-article -Jessica -table -3

These represent the benefits the retailer may gain and make together over € 24 million. Of course the assumption here is that all consumers would buy with the increased accuracy of stock, which would mean a 7,8% increase in the sales. 

But let's assume that the sales increases even with 2%. It would mean € 6,25 million growth and a cost saving of € 711 818, meaning that the bottom line after implementing RFID would be roughly € 7 million more than prior to RFID. And this calculation is now conservative.

And what lies in the cost side?

The costs are calculated in the picture below

ROI-article -Jessica -table -2

So to constitute in this example the benefits exceed the costs in the first year. 

Related articles

Apparel Magazine article: Accuracy in Action: Item Level RFID takes off

1 comment on “The essentials of ROI calculation in retail RFID”

  1. Gravatar of Amin RashadAmin Rashad
    Posted 08 February 2016 at 17:39:58

    Dear Mr. Ms.
    Please, I highly appreciate that you send to me a sample copy of calculation model sheet for ROI in retail application.

    Thanks for your cooperation.
    Kind Regards.
    Amin

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