Wal-Mart and the Three Great RFID Lies

One of the Three Great Lies used to be: My wife doesn't understand me. What are the Three Great RFID Lies?

The Three Great Lies used to be: My wife doesn't understand me; I'm from corporate and I'm here to help you; and . . . I forget the third. What are the Three Great RFID Lies?

The last time I counted, more than 65 venture-backed companies were committed to RFID technology. Assume a $20 million investment in each, and that's $1.3 billion invested in RFID. Each company submitted a business plan that essentially said: RFID is going to be the next great multibillion-dollar market (Lie No. 1); every company that sells to Wal-Mart will be required to use RFID tags (Lie No. 2, though this remains to be seen); and Wal-Mart is strongly behind RFID (Lie No. 3).

RFID is a technology in search of a problem. There isn't a single industry standard yet, who knows how many vendors will be around in five years, and the RFID tags and readers are less than foolproof. The technology is young, and investments now could be obsolete or leapfrogged. Consumers see no benefit in RFID and perhaps some loss of privacy. Retailers feel RFID may discourage theft, but its cost effectiveness has not yet been proven. Where does this leave Wal-Mart?

Wal-Mart will sell $350 billion in merchandise this year. Each Wal-Mart supercenter sells 120,000 different items, and there are more than 2,200 supercenters and more than 3,000 stores in all. For some companies, such as Procter & Gamble, Wal-Mart accounts for 15% of their business. It is the category leader in clothing, toys and a half-dozen other areas, and is the largest private employer in the United States and Mexico. Among American families, 93% shop at Wal-Mart at least once a year and 100 million Americans make a trip there weekly. Wal-Mart is the monster from Arkansas, and mere mortal companies tremble when it makes a directional statement about where its technology is moving. Wal-Mart persuaded its suppliers to migrate to RFID with the promise of great cost savings that they could share.

RFID was supposed to replace bar coding, but putting a bar code on a package costs nothing. Putting on an RFID tag costs 15 cents, and then you need all the ancillary technology and software. Wal-Mart made its top 600 suppliers implement the program with the promise that nothing was going to stop it. The plan was to have all of Wal-Mart's 120 distribution centers eventually up and running. To date, just five are.

Here's what happens: Wal-Mart hypes the technology. It uses the carrot and stick with its suppliers: "This is in your best interest" is the carrot, and "Aren't we in a wonderful partnership?" is the stick. Wal-Mart never expects to actually "pay" for the tags, the software or the development. It convinces its suppliers this cost should be borne by them and will make them more profitable. The hype leads to investment money coming into the market, which creates an oversupply of vendors -- all of whom fight for market share and continually drop their prices and delay their profitability.

Remember that great "Peanuts" cartoon where Lucy holds the football for Charlie Brown to kick and then swipes it away as he falls on his rear? And Lucy says, "See you here next year!"

Wal-Mart wasn't the first company to play this game: General Motors was. Many years ago, GM was pushing its Manufacturing Automation Protocol on every computer vendor and demanding this was a key decision criterion for future IT purchases. This took tons of time and even more money. Everyone was on board -- except GM, which wasn't even committed to the protocol at the car-making level. This was the only level that really counted; it was one or two crazies in the IT department who were on the ultimate power trip.

When you're a supplier dealing with Wal-Mart, there's going to be a lot of blood on the floor -- and it's going to be yours. Suppliers will never criticize their biggest customer, but most don't expect to ever see a return on their RFID investment and suspect Wal-Mart hasn't achieved its hoped-for savings. This doesn't mean suppliers haven't spent millions building out their facilities to handle RFID and are still waiting for Wal-Mart to expand the program and pass along some of these illusionary savings to them.

In the meantime, wanna kick the football, Charlie Brown? I promise I won't pull it away this time.

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