The ‘spychips’ that will change the way we shop

By Euan Stuart Dec 09, 2005

The more observant of MoneyWeek readers, and in particular those doing their Christmas shopping in New York, may have noticed a new kind of shopping tag adorning some of the presents they’ve bought this year.

These tags look harmless – just like a slightly thicker ordinary label – but there is more to them than meets the eye. They are radio frequency identification devices (RFIDs), and they are in the process of revolutionising the retail industry, replacing the barcode technology that’s been in operation for more than a decade.

The technology embedded in RFIDs uses tiny “passive transponders” to store information and allow anything they are attached to to be tracked (by anyone with the right equipment), says Tom Dunmore in The Sunday Times, from manufacturer to warehouse, from warehouse to shop shelf and, unless they are disabled at the till, all the way to the consumer’s home. Hundreds of tags can be read in seconds, making inventory information more easily and quickly available than ever.

A recent survey conducted by the University of Arkansas showed just what this can mean for inventory control: RFID-enabled stores were “63% more effective” at replenishing out-of-stock items than traditional stores, and RFID-tagged items were three times less likely to be out of stock than non-tagged items at the same store.

This kind of thing is immensely attractive to retailers (particularly now, as they battle to cut costs to deal with the sales downturn in the West), so it is no wonder that industry estimates for the RFID market see it as being worth $27bn by 2015, up from a mere $1.5bn last year.

In the UK, Marks & Spencer has been an early adopter, starting to use the tags in autumn 2002 to track its food products. RFID is also soon to be adopted by Transport for London in its new Oyster transport pass.

However, it is in the US that RFID is really invading retail space. Wal-Mart said recently that it expected more than a quarter of its US stores to be able to handle RFID tags within the next 18 months, says Jonathan Birchall in the FT. And as Wal-Mart’s suppliers are made to adopt the system, so it will spread throughout the industry. Eventually, says Wal-Mart, all products will have a tag the size of a grain of sand integrated into them.

But retail isn’t the only industry that is set to be transformed by RFID technology. It has long been used to track animals during transportation, but today it is used in automatic road-toll collection and now its use is exploding as a means of following parcel delivery and airline-baggage transfers. Next, the tags may even end up in passports and being used in the home (to re-order household products automatically as they run out, for example).

Not everyone is happy about the new technology. Some commentators have dubbed the tags “spychips”, says Howard Wolinsky in the Chicago Sun-Times, and envisage a chilling future in which RFIDs invade our privacy by tapping into the signals emitted by our clothing, our electronic items, and even stealing our cash if it, too, ends up in some way ‘chipped’ on to cards. They also worry that governments could use the technology to track law-abiding citizens.

Whether that is an accurate view or a paranoid one remains to be seen. For now, however, what we do know is that the days of the humble barcode are well and truly numbered and that the growth in the use of RFIDs has only just begun.

Two plays on the new technology

While there will be a number of big winners from RFIDs (it is estimated that Wal-Mart will make annual savings of $620m from using them), the real beneficiaries will be smaller – albeit riskier – companies in the field. In the UK, one of these is specialised plastics company Carclo (CAR, 69p). The firm provides materials to the auto market so has suffered from poor trading recently. However, it has another division called Conductive Inkjet Technology (a joint venture with inkjet specialist Xennia). CIT is a process that prints conductive metals digitally onto a variety of substrates and is key in the production of RFIDs. The company is now preparing for “volume production” and is seeing a high level of interest from large players in the field. The downside? The stock trades on a p/e ratio of 17 times – not cheap.

Another higher-risk pick is UK-listed, but Hong Kong-based, firm RC Group (RCG, 38.5p), which floated on Aim last summer. The firm recently signed a contract with a Chinese government agency to install RFID technology in warehouses for firms in Xiaolan, says Kim Hunter Gordon in The Observer. The company is currently working on warehousing for Wal-Mart and Tesco and on domestic biometric locks. It is currently the “only company in the world” to specialise in both the biometrics and RFID fields. As yet unprofitable, it’s still one to keep an eye on.

Published in Tips & advice | More articles by Euan Stuart

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