Technology continues to reshape how brand owners package, distribute and merchandise their goods. One of the more provocative technologies to watch, moving into the future, is radio frequency identification (RFID). In combination with the electronic product code (EPC), RFID may eventually replace bar coding as a method of product tracking.

In contrast to bar codes, which are printed, RFID uses radio technology. When an RFID chip is incorporated into a “smart tag,” the chip’s encoded information can be read using an RFID “reader.” In packaging applications, each tag is encoded with an EPC that becomes the unique identifier for the tagged item.

Used mainly at the case and pallet level currently, RFID tags promise to become ubiquitous on consumer goods packages within the next several years. Movement toward RFID at the primary-package or item level invites speculation on the ways in which the technology will help consumer goods manufacturers improve brand loyalty, customer safety and the retail experience.

For now, several issues, including cost, privacy concerns, and reliability, are holding back item-level tagging.

In spite of the obstacles, a few retail leaders, including Wal-Mart Stores Inc. and Target Corp., are conducting EPC pilots. Wal-Mart’s top 100 suppliers and 37 volunteers are working toward meeting a January 2005 deadline, imposed by the retailer, to go live with EPC tagging on pallets and cases in North Texas.

In addition, some pioneering brand owners, such as Hewlett-Packard, are putting tags on individual cartons containing large and/or high-ticket items such as printers. It will take a few more years for item-level tagging to occur on packaging for smaller, lower-end consumer goods.

“We’re in a slow progression toward a 10-year horizon for individual item tagging,” says Mike Klaus, President of ArcStream Solutions Inc., a consulting firm that specializes in supply chain technologies.

During that period, the cost of RFID tags will come down. Today, tags cost anywhere from 10 cents to $1 each. Because of the many packages that would require individual tags, pundits say the cost must come down to five cents or less before individual package tagging will become pervasive.

“We’re talking about trillions of objects. For the EPC to be as ubiquitous as the bar code is today, the tag would have to cost fractions of a cent. It will be some 10 or 15 years before the technology gets to that sort of price,” says Paul Fox, Director of Global External Relations at The Gillette Co.

Gillette has been deeply involved in RFID and smart-shelf pilot programs. Smart shelves use RFID technology to monitor how many packages are on the shelf and communicate the information to store personnel, flagging restocking.

Last year, Gillette and Wal-Mart made news when consumer privacy advocates threw a harsh light on a smart-shelf trial planned for a Wal-Mart store in Brockton, Mass. The brouhaha forced the abrupt cancellation of the pilot program.

The uproar about privacy centers on the misperception that item-level RFID tags could be used to track consumers’ use of products in their own homes.

But in fact, the “passive tags” used in packaging applications are read-only; manufacturers and retailers cannot record consumer information onto this kind of tag. “There are read-write tags, but they’re not used under EPCglobal” guidelines, explains Michael Sheriff, CEO of AirGATE Technologies. EPCglobal Inc. is the standards body that defines specifications for the codes used on RFID tags.

“RFID chips themselves pose absolutely no privacy issue. It’s only when you link the RFID chip to private information” using tactics such as loyalty cards that there’s an issue, says Omar Hijazi, Principal, A.T. Kearney, Inc.

The idea that someone could stand outside a house and use an RFID reader to find out what products are inside also is unfounded, because the maximum read range for EPC tags is only about six feet.

But consumers don’t necessarily know these technical basics, so they remain wary. To soothe their fears, consumer goods companies are pondering various tactics. One option is to disable or remove the tag at the cash register. Another is to give consumers the choice of opting in or out of loyalty programs and promotions that leverage RFID’s data capabilities.

Even with the current impediments to item-level tagging, certain product categories are well positioned to lead the charge. A report from ARC Advisory Group entitled “RFID Systems in the Manufacturing Supply Chain” indicates the pharmaceuticals segment could emerge as “the dark horse in RFID adoption.”

Product prices, the need for brand protection, product-recall requirements and pressure from the FDA are driving pharmaceutical manufacturers to use RFID at the item level for wholesale and individual-size packages.

In contrast to low-cost items such as gum or soup, pharmaceuticals have high enough prices and margins to justify the cost of the tag. In addition, pharmaceutical manufacturers are keenly aware of the need to protect their brands from counterfeiters.

Industry estimates place pharmaceutical manufacturers’ annual loss to counterfeiters at $12 billion. By uniquely identifying the item as the drug and the brand it appears to be, RFID item tagging makes counterfeiting almost impossible—or at least impractically expensive.

In February, the FDA issued a strongly worded suggestion that pharmaceutical companies move to RFID tagging in the near term to protect consumers from counterfeit drugs. A news release from the agency states that it believes RFID “tagging of products is feasible by 2007, and could be an effective way to track and trace drugs from the point of manufacturing to the point of dispensing.”

Further into the technology-adoption cycle, when consumer goods companies are using RFID tags on individual packages, many other branding and merchandising benefits will materialize at retail.

The largest of these will be the prevention of out-of-stock products on mass merchandisers’ shelves. According to Gus Whitcomb, a spokesperson for Wal-Mart, “The No. 1 thing RFID is going to do in the short term is help with merchandise availability” by helping retailers track the location of their merchandise in real time.

Currently, out-of-stock merchandise “is a huge problem. It is something we are very much looking forward to having EPC help us with, because right now we know that products can be out of stock 8 to 12 percent of the time. That’s a huge chunk of time,” says Jeannie Tharrington, a spokesperson for Procter & Gamble.

The rule of thumb, among consumer goods marketers, is that one of three things happens when a consumer is faced with an out-of-stock product. The consumer either:

Delays the purchase or buys an alternative product in the brand portfolio.

Goes to another store.

Buys a different brand.

Thus, out of stocks can erode brand loyalty. “It’s very difficult, especially if you lose a customer to a competitor brand. Sometimes they don’t come back. Hopefully our products are good enough that if it’s not on the shelf, people will wait or buy it somewhere else. But the reality is, you do lose people that way,” Tharrington says.

RFID tagging opens up the possibility of creative new promotions that could help offset the cost of the tags. Although the EPC tags contain only a limited amount of data, RFID technology makes it possible to create tags that contain a great deal of information.

“Given sufficient memory, you can put all kinds of interesting stuff into the tag. You could put contest promotions, coupons or rebates on it, and you could vary that from product to product,” says Matt Ream, Senior Manager-RFID Systems, Zebra Technologies Corp.

For now, futuristic RFID retail applications are on-going in labs such as the Metro Group RFID Innovation Center. Metro Group is a retailer based in Germany, and its Innovation Center provides test areas where Metro Group’s consumer goods suppliers can learn how the technology works under real-life conditions. The focus is on RFID readers and chips for different merchandize categories, packaging units and applications.

 The Center’s test areas include simulated selling spaces for clothing and food, and the Center reproduces the flow of goods from warehouse to point of sale. Select RFID suppliers, including Checkpoint Systems Inc., have installed their products at the Center.

Checkpoint’s installed applications include smart rails and shelves as well as RFID tags and labels on apparel. The clothing tags help shoppers find what they are looking for. By scanning the tags, they can find out which sizes and colors are in stock.

In addition, the changing room of the Innovation Center includes an RFID reader that interacts with Checkpoint’s Smart Merchandising screen. After reading the tags of the clothing the customer has brought into the changing room, the screen suggests additional, complementary items.

When these kinds of applications finally become mainstream, RFID will have fulfilled its potential as a technology that can boost brand value, brand loyalty and customer satisfaction. BP

The author, Kate Bertrand, is a San Francisco-based writer specializing in packaging, business and technology. Contact her at kate.bertrand@sbcglobal.net