Bar Codes Better Watch Their Backs

New retail technologies have a way of lingering in dreamland until discount colossus Wal-Mart decides it's time for everyone to wake up. The alarm clock in Bentonville, Ark., just went off again, this time for a successor to bar codes called Radio Frequency Identification (RFID). The wireless technology aims for a world where shelves are always full, supply chains hum efficiently, and consumers are bombarded with promotions as they shop.

The wake-up call came from Wal-Mart Stores Inc.'s Chief Information Officer Linda Dillman. She recently announced that the megaretailer will require its 100 top suppliers to start using RFID for some applications by January, 2005. Given Wal-Mart's enormous size and influence, the technology could spread quickly: Not only will other retailers be forced to adopt it to remain competitive, the wider use will also bring down installment costs. "A lot of people don't want to be the first in the water," says Kevin Ashton, head of the Auto-ID Center, a consortium that is developing RFID. "But one Wal-Mart is worth 101 other companies."

So what is RFID? The postage-stamp-size tags combine tiny chips with an antenna. When a tag is placed on an item, it automatically radios its location to readers on loading bay doors, store shelves, or shopping carts. The tags are also linked to computer networks, where inventory data are stored. That might include when and where a specific item was made, its color or size, and at what temperature it should be stored.

RFID could drastically cut costs and smooth out bumps in the supply chain. Because the tags automatically transmit information to a network, warehouse staff and store clerks would no longer have to swipe each item with a bar code reader when taking inventory or toting up a customer's sales. That means fewer staff and lower costs. According to Sanford C. Bernstein (AC ) & Co. analyst Emme P. Kozloff, Wal-Mart could save $8.4 billion a year by 2007 by installing RFID in many of its operations. The technology even promises to reduce theft: When large numbers of an item are removed from shelves, RFID will alert employees.

Just as important, companies will have an instant read on inventory. That means retailers and suppliers can respond quickly to shifts in demand, avoid spoilage, and prevent over- and understocking. British grocery chain Tesco and Gillette (G ) are testing RFID in Cambridge. Gillette believes its sales could jump 15% if store shelves are always stocked and thieves stopped.

That's just for starters. As the technology blossoms, RFID tags will trigger in-store promotions. Customers may swipe a discount card through an RFID reader attached to their shopping cart, for example. The store may then offer special deals, based on tagged items the customer has put in the cart or what he bought in the past. Eventually, shoppers will even be able to ring up purchases as they put them in the RFID-equipped cart.

None of this will happen overnight. Tags now run about 10 cents apiece, and won't be feasible until they're under a penny. Tech glitches such as radio interference also could delay implementation. And companies will have to convince consumers that the tags are not a threat to personal privacy. With Wal-Mart pushing RFID, however, retailers and consumers will be grappling with these issues far sooner than anyone had imagined.

By Gerry Khermouch and Heather Green in New York, with bureau reports

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