VDC Research: RFID, Barcode, Retail Automation & Self-Service Market Blog

Would You Pay Extra to Pay with NFC? Neither Would We.

Here’s a hypothetical decision: Would you pay $60 for an NFC-enabled iPhone case that enables you to pay via your smartphone—but only at ISIS partner merchants in Salt Lake City and Austin? Or, would you prefer to pay anywhere (at no additional cost) with old-fashioned cash or credit/debit cards? The choice seems absurdly clear—the vast majority (we would estimate 99%) of consumers will choose cash or card payment.

Still, despite a market opportunity that we believe is accurately summarized by the above choice, vendors with aspirations to cash in on mobile payment and NFC hype continue to introduce NFC retrofit solutions for smartphones lacking embedded NFC. Incipio is the latest entrant, having debuted its “Cashwrap” NFC-enabled iPhone 4/4S case earlier this week at CES. Incipio joins a market that seems crowded considering the nascent state of the NFC ecosystem in most regions. For example, companies such as DeviceFidelity, Flomio and Wireless Dynamics already offer (or are developing) similar accessories for both the iPhone and older Android devices. Frankly, given NFC’s weak support within enterprises and low awareness among consumers (not to mention that cash and cards are a free and highly effective alternative), we wonder: who is buying these products?

Among consumers, NFC contactless payment faces a daunting uphill battle to mainstream acceptance for at least two key reasons:

• Cash and cards’ familiarity with consumers across all demographics
• Security concerns, especially for solutions storing payment credentials on the device (as opposed to the cloud)

Keeping in mind the above factors, it is unlikely that the average consumer will spend additional money, time and effort to pay via NFC. If NFC-enabled contactless payment is to gain broader adoption, it must be absolutely frictionless to use (meaning no special cases, SIM or MicroSD card required) and offer incentives for ongoing use (for example, rewards or exclusive deals) to ensure consumers do not revert to cash or cards. Remember, cash and cards are accepted everywhere and cost the consumer nothing—in terms of money, time or effort—to use. We believe an NFC payment solution that cannot say the same has a highly challenging path to success.

VeriFone Furls its SAIL

Less than a year after launching its SAIL m.payment solution, payment terminal giant VeriFone has essentially pulled the plug on the product, which is its version of a Square-style card reader dongle. Citing a number of major challenges, including fierce competition in this nascent, but rapidly-growing market and the razor-thin margins on SAIL-based payments, the Company’s CEO officially disclosed SAIL would cease operations (save for continuing to service current users) in its recent Q4 earnings call.

While it is somewhat surprising that a well-established company like VeriFone is bailing out on a new product so quickly, the closure of SAIL clearly demonstrates the cutthroat competition in this market and could portend further consolidation or business failures of other similar ventures in the near-term. Certainly there is no shortage of Square-like solutions, with numerous hardware- and software-based competitors in the consumer-grade device mobile payment market (including Intuit, Paypal, Dwolla, iZettle and Groupon, just to name some high-profile players). Perhaps even more problematic for these m.payment service providers is that the business model on which they are founded is generally a race-to-the-bottom in regards to profit margins, with the major differentiator between each competitor often being the percentage fee charged for processing payments.

Looking ahead to the future, we believe the mobile payment competitors that will be viable for the long-term will be those that successfully layer value-added applications/services such as loyalty, coupons/offers and other mobile commerce functionality on top of their basic payment processing service. To the extent that these adjacent applications drive stronger customer loyalty, larger average ticket sizes and increased footfall for merchants, m.payment service providers can leverage them to generate additional revenue streams, differentiate their offering and attract new merchant partners. Conversely, we expect m.payment providers that remain reliant on processing fees for the majority of their revenues will see fiercer competition, shrinking margins and increasingly stronger chances of failure as payment processing service becomes more commoditized.

 

 

 

NCR Continues to Diversify with Acquisition of Retalix

NCR formally announced this past Wednesday an agreement to acquire Retalix, an Israeli vendor of retail, marketing, supply chain and logistics software solutions. The transaction is valued at $30 per share, or approximately $650 million and is expected to close sometime during Q1 2013. NCR intends to finance the acquisition via a combination of cash and an existing debt facility. Via the acquisition of Retalix, NCR strengthens its competitive position in several respects:

• Expanding its retail automation and customer engagement hardware offerings to include a more diversified range of software solutions, both for customer- and employee-facing applications
• Broadening its services portfolio to include additional professional/integration and managed services options
• Solidifying its status as a go-to vendor for end-to-end solutions that meet the specific, unique requirements of retail end users

We view the Retalix acquisition as a well-advised strategic move that furthers NCR’s diversification into the enterprise software market. While it has historically been known for high-end customer engagement and retail automation hardware (in addition to kiosks, ATMs, etc.), during the past 18 months, NCR has made a concerted effort to broaden its software portfolios—especially those geared towards retail and hospitality end users—via strategic acquisition and organic development.

For example, in August 2011, NCR acquired Radiant Systems, a specialized provider of hospitality POS software and solutions, for approximately $1.2 billion. The addition of Radiant materially strengthened NCR’s competitive position within hospitality, where the company had historically been weak relative to its status as a retail leader. In retail, the company recently launched its NCR Silver product—which enables merchants to integrate POS-enabled iPads, iPhones and iPod touches with stationary POS terminals—to address the rapidly growing demand for consumer-grade mobile device use in the enterprise. While Silver is geared towards SMBs, we expect the Retalix solutions that will soon be part of the NCR portfolio will appeal to a broader range of retailers, including Tier 1 leaders like Home Depot and Walmart, where the company has a well-established installed base.

Furthermore, we believe NCR’s efforts to diversify its software and service capabilities are indicative of a broader interest among end users (merchants and hospitality operators especially) to leverage technology platforms for a set of applications well beyond those with which they are traditionally associated. In the context of POS systems, for example, requirements now often include applications besides typical sales and payment functions. In hospitality, operators also need to accept/administer loyalty programs, manage digital menu boards, accept mobile payments/coupons and potentially support a range of back-of-house functions as well. Retail has similarly diverse requirements—and the acquisition of Retalix will enable NCR to meet these needs more consistently across a broader range of merchants. 

The growing importance of specialized merchant/hospitality solutions is a topic we will explore further our upcoming MCET research—contact us for details.

Google Wallet to Go “Back to the Future” to Drive NFC Adoption?

It is no big secret that Google Wallet has been challenged to gain adoption since it officially launched in September 2011. While the app faced a number of headwinds in its very early days, the initial version of Google Wallet was especially hamstrung by the very limited number of payment card types and smartphones that supported the app. Since its introduction, these problems have generally been addressed, as the app is now available on a broader range of devices and has implemented a new hybrid architecture that leverages cloud-based technology to enable almost any common credit/debit card to be used with Google Wallet.

Still, despite these improvements to accessibility and usability, Google Wallet has yet to gain traction with consumers and has left its management looking for other strategies to drive adoption. If recent rumors prove true, Google plans to introduce a decidedly low-tech expansion—in the form of a traditional plastic payment card—to its solution sometime soon.

Essentially, the Google Wallet card—as it is rumored—will enable consumers to load all the cards in their wallet onto an online portal and link them to the Google Wallet card, thereby offering the potential to slim down the brick-like stacks of cards many of us carry in our pockets and purses. The Google Wallet app (in conjunction with the online portal) would provide consumers the ability to manage which credit/debit card they want to pay with when using the Google card and continue to offer contactless payment for devices and merchants that support it. Rumors indicate that the card will only be available to Android users if/when it launches. Perhaps it will eventually be offered to iOS users too, but given the state of affairs between Google and Apple, we are not betting on it.

From a strategic perspective, we think adding a card extension to Google Wallet is well-advised, as it opens the app to a broader audience of potential users—including the majority of the US population that does not own an NFC-enabled phone. Furthermore, a Google Wallet card is a palatable intermediary step that could allow Google to ease mobile-payment-weary consumers into migrating from traditional card-based payment to mobile contactless payment.

From a consumer’s standpoint, consolidating multiple credit/debit cards into a single one is certainly an agreeable concept to those of us—myself included—that carry overloaded wallets. However, it is difficult to envision many consumers taking the initiative to obtain, configure and use a Google Wallet card/app solution for this benefit alone. To justify consumers’ investment of time and effort, there needs to be some kind of compelling, undeniably attractive incentive to reward them—something along the lines of cash-back rewards, discounts or some other feature that will capture consumers’ attention and keep them coming back for more. Otherwise, we see this rumored Google Wallet addition being another payment innovation flop.

Think Self-Checkout is Dead? Think Again.

During the past 18 months or so, we have observed a decidedly negative attitude towards the future viability of Self-Checkout (SCO) solutions in US retailers. Throughout 2011 and 2012, a number of large grocery chains—including Kroger and Albertsons—announced SCO lanes will be replaced with old-fashioned staffed lanes instead. The retail technology blogosphere has also joined the anti-automation bandwagon, with articles frequently bemoaning the clunky operation of early solutions and their perceived job-killing effect. Despite this anti-SCO sentiment, many store chains across all retail sub-verticals continue to offer SCO as a checkout option. In fact, some merchants are actually increasing SCO investment. This week, NCR announced it will deliver 10,000 additional SCO stations across WalMart’s 1200 US stores during 2013. Financial terms of the deal were not disclosed, but, based on VDC’s most recent AFSP data, we estimate the value of this contract to be approximately $150-160 million.

Notwithstanding its abandonment by certain retailers, SCO remains a useful technology when deployed in appropriate retail settings. Like any other solution, it has certain vertical/sub-vertical applications to which it’s well-suited, and others it’s not. While certain early SCO systems were buggy and difficult to use (we have experienced them ourselves), modern offerings have largely addressed these shortcomings, offer time-strapped shoppers an attractive alternative to waiting in line and often complement other retail solutions such as Personal Shopping Systems. VDC therefore believes SCO will remain an important component of many retailers’ broader front-end technology solutions, particularly in grocery/supermarket, mass merchants, wholesale clubs and home improvement stores.

In regards to WalMart’s upcoming SCO rollout, we expect its investment decision was motivated in part by the retailer’s ongoing experimentation with customer-operated mobile shopping apps. Specifically, WalMart is one of the founding members of the Merchant Customer Exchange (a consortium of more than 20 US merchants working cooperatively to develop an interoperable, cross-brand mobile wallet) and also recently announced small-scale pilots of a smartphone-based self-scanning app. As these two initiatives progress—and if/when they move towards full-scale deployment—we expect self-service technology like SCO will play a key role in their day-to-day use by customers. Convenience and time savings are two of the key value propositions these mobile apps offer, and both are strengthened by the presence of SCO as a checkout option. Accordingly, we expect to see SCO defend its established place within the retail automation spectrum, especially among technology-embracing merchants like WalMart . Furthermore, by virtue of its recognition as a retail sector leader, WalMart could give its SCO-doubting peers reason to reevaluate their own automation strategies.

RFID Could be the Prescription for Better Safety in Pharmaceutical Manufacturing

VDC believes recent, high-profile cases of tainted pharmaceuticals in the US potentially could drive RFID adoption within the US pharmaceutical industry. For example, consider the fungal meningitis outbreak that has emerged during the past several weeks and, to date, caused 25 deaths. Ultimately, the meningitis cases were linked to steroids manufactured by a Massachusetts-based company. As a result of the national scale and severe consequences of this incident, the US pharmaceutical industry is under intense public and regulatory scrutiny—and we think new, more stringent legislation for pharma could be the result. Specifically, VDC expects new FDA regulations governing the manufacture and tracing of drugs—from the manufacturer to the end consumer—could be one of the near-term outcomes of this outbreak. Such legislation could include mandated use of RFID or other solutions to provide better visibility into—and control of—the pharmaceutical supply chain.

Should the FDA require RFID use in pharmaceutical manufacturing, it would not be an unprecedented legislative development. In fact, the South Korean government has implemented regulations mandating RFID use by its domestic manufacturers to reduce drug counterfeiting and its various negative collateral effects (e.g., loss of revenues, reduced drug efficacy, risk to consumers, etc.). RFID tagging of drugs at the point of manufacture has a number of potential benefits, depending on the applications for which the technology is used. The following objectives are common RFID adoption drivers among pharmaceutical manufacturers:

• Ensuring drug authenticity
• Providing better visibility into the supply chain and chain-of-custody of controlled substances
• Improve patient safety by expediting recalls and eliminating counterfeit drugs

Considering the enormous size of the US pharma market (approximately $260 billion in 2011 revenues), increased adoption of RFID within this manufacturing sub-vertical would have material growth implications for the broader RFID market—especially if use of specific RFID solution types (e.g., track-and-trace, authentication) is mandated by future FDA legislation.

Regardless, bearing in mind the potentially dire consequences of tainted, counterfeited, or otherwise compromised drugs—both in terms of injury/death to consumers and the resulting liability claims, just to name two—VDC believes all pharmaceutical manufacturers are well-advised to evaluate all technology solutions (including RFID) that could improve patient safety and control of their supply chains, whether government mandated or not.

Datalogic Celebrates its 40th Anniversary

This week, Datalogic, a global leader in the market for barcode readers, mobile computers, machine vision systems, personal shopping/self-scanning systems and other AutoID solutions is celebrating its 40^th anniversary. During its infancy in the early 70s, the Company specialized in the manufacture of photoelectric sensors for the textile, ceramics and packaging industries, but via ongoing investment in in-house R&D and strategic acquisitions, Datalogic’s product portfolio has steadily expanded to include a spectrum of AutoID solutions. During four decades of operation, the Italy-based Company has also vastly increased the geographic scope of its business, expanding from its original European focus to become a truly global AutoID vendor.

While Datalogic has maintained an international presence across EMEA, Asia-Pacific and the Americas since the 80s, the Company has historically been strongest in its home European market. However, over the past 18 months, Datalogic has made a concerted effort to fortify its competitive position in the Americas, particularly within the US market. To achieve this goal, the Company recently completed two significant acquisitions—PPT Vision, a supplier of machine vision solutions, and Accu-Sort, a vendor of industrial scanning and imaging solutions.

Not only have both of these acquisitions materially boosted Datalogic’s market share within each respective technology market; they also have afforded the Company instant access to well-established regional distribution networks and new application/vertical opportunities. Via the Accu-Sort transaction, Datalogic became the stationary industrial barcode scanner share leader in the Americas, according to VDC’s data. VDC expects the Company will continue to strengthen its presence in that region as it integrates these two acquisitions and fully harnesses the operational and sales synergies they offer.

Looking to the future, VDC believes Datalogic will continue to build its presence in the AutoID markets via pursuing additional complementary acquisitions, logical expansion into adjacent/emerging technologies and maintaining its position as an AutoID innovator through ongoing R&D investment.

 

 

Urban Outfitters CIO Says Its Checkouts are Going Fully Mobile

In a recent post, we discussed the impact mobile POS adoption is having on the broader POS market, particularly in the context of stationary POS heavyweights like NCR, IBM, Wincor-Nixdorf and the like. Long story short: m.POS has proven itself to be a valuable retail tool during the past 18-24 months, and has reshaped the POS competitive landscape as a result. An increasing number of merchants are investing in mobile POS, and in doing so, are disrupting some long-established conventions in retail automation technology. Urban Outfitters (UO) is among the latest examples of retailers that have committed to m.POS—and this particular apparel retailer has done so in a big way. The Company’s CIO announced last week that its stores will abandon stationary checkouts and go fully mobile in the near-term.

Urban Outfitters is no m.POS newcomer, having used mobile POS in its stores for approximately two years. However, its shift to a fully mobile checkout strategy marks an unprecedented level of commitment to the technology for the company. Until now, UO deployed mobile POS only as a complementary solution alongside its traditional, stationary terminals. As with its earlier deployments, UO’s chain-wide m.POS rollout will use iPad and iPod touch devices running an application that supports returns/exchanges, stocking, inventory inquiries and special orders—in addition to standard checkout and payment functions, of course.

As is typical with m.POS deployments, UO cited improving customer experience and empowering employees as key factors driving the transition to a 100% mobile POS solution. Interestingly, UO also acknowledged the cost advantage of mobile vs. stationary terminals—something most retailers do not mention when discussing their mobile investment. According to the Company, its iPad-based terminals are approximately 1/5^th the cost of a standard stationary terminal, while iPod-touch based units are only 1/10^th. Obviously, the lifecycle of consumer-grade devices will not match that of the more robust enterprise-grade POS terminals, but we wonder exactly how much more frequently the iPad/iPod touch will be need to be replaced.

While VDC believes in the value, utility and long-term viability of mobile POS in retail and other types of merchants (especially hospitality, including QSRs, fast casual and table service restaurants) we are not sold on the notion that mobile POS is a universal replacement for traditional, stationary checkout. Certainly, some brands and store formats (e.g., Apple Stores) are well-suited to going fully mobile. Conversely, such a move could be entirely disastrous in other merchants for a variety of reasons, including large average basket sizes, store size and layout, for example. That being said, we think Urban Outfitters’ store size, layout and brand image bode well for a successful transition to an all-mobile POS strategy. Mobile POS is one of the markets VDC will be tracking in our 2013 MCET research. Click here to learn more.

Happy 60th Birthday to the First Barcode Patent Filing!

This week marks the 60th birthday of the first patent filing for a technology that is very close to our hearts here in the VDC AutoID practice: barcode. To most people, a barcode is nothing but a bunch of black and white lines on the products they purchase at the store, but for us—the AutoID professionals and enthusiasts of the world—the barcode is an efficient, elegant and cost-effective way of storing and accessing data that has stood the test of time.

In the technology world, 60 years is an eternity. Reflect briefly on the devices/ technologies that seemed cutting edge just 10 or 15 years ago, and we bet you will smile reminiscing about the simpler days of dial-up modems, Zack Morris-style cell phones and good old PDAs. Now consider that barcode existed for decades before all of these things, and that it is still alive and well today. In many ways, it is a notable achievement. While barcode is certainly a mature technology, we see a strong future ahead for the barcode market, thanks to its ongoing evolution and the development of vertical- and application-specific uses. VDC sees a other indicators of barcode’s vitality:

• Increased consumer use of mobile barcode for a range of commerce-related applications including couponing, loyalty, information access and even payment. Demonstrated consumer interest in scanning barcodes via their smartphones is driving retailers, hospitality providers, CPG brands and other consumer-facing enterprises to invest in solutions that engage these shoppers.
• The US FDA’s Unique Device Identifier (UDI) mandate will increase barcode adoption (and other AutoID solutions) in healthcare: The federal UDI mandate, set to take effect in 2014 for high-risk (i.e., implantable) medical devices (and subsequently for lower-risk categories) requires all medical devices to be marked with a unique code containing critical information including manufacturer, model number and expiration date. While we expect barcode will not be the only solution used to comply with this regulation, it is highly likely to play a prominent role.
• New symbologies have recently emerged, and others are in development. Han Xin Code and Ultracode, for example, are two of the most recently introduced barcode types. Han Xin codes were developed to encode large numbers of Chinese, numeric and ASCII characters, and can be printed in multiple sizes, while Ultracode was designed for printing on uneven surfaces that are poorly-suited to standard symbologies. We expect additional symbologies could emerge in the future to address specific requirements, particularly for consumer-facing applications.

Some NFC and RFID evangelists claim these technologies will ultimately lead to the demise of the barcode. VDC does not expect that to happen, nor do we expect any major market shift away from barcode to occur anytime soon. Barcode has a lot of momentum and will be extremely difficult to displace:  it is universally supported, highly cost-effective (from both a printing and hardware/solution perspective), familiar to consumers and enterprises and boasts 40 years of proven experience in retail—barcode was first tested by Kroger Supermarkets in 1972, 20 years after its invention. The “scanless”/contactless future NFC and RFID promise could very well become reality someday far from now, but for the time being, we expect barcode to remain dominant in most applications. Happy birthday, barcode…

A Savvy Acquisition of Savi Technology?

In the late 2000s, Savi Technology, an active RFID solutions provider, was among the major beneficiaries of an approximately $430 million US Department of Defense (DoD) contract commonly referred to as “RFID III” (The Company also enjoyed strong growth through earlier announced large DoD RFID contracts). One of the principle objectives of this RFID funding was achieving “In-Transit Visibility” (ITV), which essentially meant establishing real-time insight into the progress and location of various DoD assets (e.g., cargo, personnel, vehicles, equipment, etc.) during their journey through the supply chain—from point of origin to final destination. The DoD selected Savi, along with several other well-known defense contractors (with Lockheed Martin, Savi’s parent company, being key among them), as the primary solution providers for the ITV initiative.

For its part in the contract, Savi Technology provided highly-rugged active RFID tags, which cost upwards of $100 per unit, along with other systems components. In the early days of the RFID III contract, the DoD struggled with best practices in regards to the recycling and reattachment of Savi’s tags to assets (e.g., cargo, intermodal containers) entering or re-entering the supply chain, despite their significant cost and the fact that the tags were reusable and designed for a 5-7 year lifecycle.

Several years into the RFID III contract, the Government Accountability Office (GAO) reviewed the practices of the DoD in the context of the ITV initiative. Among the findings of this investigation was the fact that significant funds were being squandered on new RFID tags, when the “old” tags could have (and should have) been reused many times over. Ultimately, this GAO revelation materially decreased demand for Savi’s tags and had a correspondingly negative impact on the company’s financial performance, especially on their renewable tag volume business. While Savi did enjoy some success outside the military space, deploying their solutions at a wide number of ports internationally, the company remained challenged by the slow pace of adoption for RFID-enabled cargo tracking and security applications, such as customs inspection.

It was no big secret in the RFID industry that Savi was struggling, and that its parent, Lockheed Martin, was looking to divest the business. Last week Savi announced that they had found a buyer.  The Company was acquired by LaSalle Capital, a private investor group based in Los Angeles. We expect LaSalle will likely seek to revitalize the Company and extend Savi’s presence outside its core historical market of Defense/Military within the US and its Allies to commercial markets. There is no shortage of potential avenues the company could explore to drive future growth with its current offerings, but we think RTLS and other forms of “RFID+” solutions (e.g., active RFID plus sensors) are among the most feasible options for Savi to pursue moving forward.