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

Zebra’s Acquisition of Hart Systems – Battling Commoditization in the Hardware Market

Global barcode label printing leader, Zebra Technologies, has recently been subjected to flat revenues in its core business, an issue that has been impacting the entire specialty printing market. This has resulted in significant pressure from the company’s stakeholder community to innovate and find new avenues for growth and business sustainability. Though there has been a lot of talk among AutoID market participants of penetrating new verticals to increase sales, we at VDC think that Zebra’s response to these pressures presents an interesting alternative.

Zebra started 2013 with its acquisition of StepOne Systems, a company focused on addressing retailers’ in-store application requirements via mobile software solutions. This acquisition marked Zebra’s initial push toward the store front, and their recent acquisition of Hart Systems (for $94 million cash) has further strengthened their retail presence. Hart Systems is a provider of cloud-based solutions in the retail space. Their core business is driven by a self-managed inventory system that operates on cloud-based solutions and barcode scanning technologies to help retailers conduct inventory without third-party assistance. VDC believes that Hart’s solutions will help Zebra make a splash in the retail space that will usher them along the way to becoming a one-stop shop for retailers. Such acquisitions will serve to fulfill Zebra’s vision of shifting focus from being a printer hardware vendor to a solutions provider.

Both companies are excited about this acquisition and the mutual benefits they anticipate it will afford. Hart Systems’ CEO Edward Tonkton noted that he is excited to become a part of Zebra’s “industry leading solutions and global reach”. Zebra’s size and strongly established distribution channels will certainly provide an excellent place for Hart Systems to expand, especially in relationship-centric verticals like retail.

Zebra also finds Hart Systems’ business model to be particularly attractive. Hart Systems has adopted a “Hardware-as-a-Service” (HaaS) business model similar to software solution providers’ SaaS strategy. Rather than sell their self-managed inventory solutions (hardware included), Hart rents them out according to retailers’ needs. This helps enterprise end-users significantly cut down on their fixed costs. It also provides them with the most up-to-date technology at the time of their need; this will become increasingly more important as innovations in the solutions and hardware fields continue to rapidly advance. We anticipate that in the future Zebra will incorporate this HaaS strategy into its primary sales model to cut costs and entice customers in a similar way.

Long product lifecycles, market saturation, and high penetration rates paint a gloomy future for AutoID hardware vendors that disregard the need to revise their go-to-market strategies. At VDC, we believe that Zebra’s decision to further penetrate the retail vertical will allow for accretive revenues that will appeal to the company’s investor community. Zebra serves as an example to the AutoID community that penetrating new markets with traditional product lines is not the only viable strategy for growth and market expansion. We fully expect Zebra to continue expanding their retail presence and, as the leading vendor in its space, set an example for its peers and key competitors.

(By Edmo Gamelin, Research Assistant)

The Legislative Future of Cyber Security

Federal security requirements for merchants and credit cards are imminent. Privacy and cybercrime was the topic of a Senate hearing on February 4 that featured testimonies from representatives of Target, Neiman Marcus, Symantec, and the Consumers Union. As stated in an earlier blog, over 1000 million customers have had their credit card information stolen from Target and Neiman Marcus’ brick-and-mortar stores in the past few months. Cyber attacks have been bombarding a multitude of markets including retail, leisure, and even government, as evidenced by the recent breach of the healthcare website, exposed to attackers searching for registrants’ personal information. Up to this point, there is very little legislation concerning standards of security that businesses dealing with personal information must adhere to. The Senate committee centered the hearing around a few specific aspects of security that retailers would have to focus on. Malware prevention standards will be the primary laws enacted. These standards will be strong but flexible, in order to make them robust against attacks while also being able to change with the ever-evolving nature of cyber attacks. Senators also pushed for a breach notification law that would require organizations that have undergone a data & security breach to swiftly contact any consumer whose information may have been compromised. There are currently no laws requiring the company to do so.

Senators also debated with the business representatives about the future of payment. The current trend in America is a standard credit card with a magnetic strip that identifies the card when swiped through a machine. The Senate and business representatives came to a consensus that this technology needs to be updated to a chip-based solution as soon as possible. Chip-and-PIN or EMV technology is already integral to daily life and transactions in Europe and several other countries, where magnetic strip credit cards are obsolete. The EMV technology requirement that the US Senate is now proposing based on feedback from retailers, banks and the consumer union on inherent costs involved, is a chip-and-signature solution. The reason for choosing this technology over chip-and-PIN is rooted in the fact that it is very similar to the current mode of payment here in the United States. Chip-based cards, by themselves, provide more advanced security and prevent cloning of cards. PINs are an additional security layer that can potentially become a part of the solution at a later date, to minimize initial investment costs. Europe has seen a significant drop off in cyber attacks on brick-and-mortar stores since the introduction of the chip-and-PIN system. However, by making a clear distinction between what is desirable and what is possible in the near term, the aim is to, at the very least, upgrade to a payment option that is much ahead of the current, outdated magnetic stripe-based alternative.

At VDC, we believe that the future of payment will go beyond EMV technology to include mobile wallets. These digital wallets allow the consumer to pay directly from their personal handheld device, usually a smartphone or tablet. We expect the solution to be consumer-friendly because they help store information for multiple credit cards in a single device while also being retailer-friendly since these can be scanned by camera-based 2D imagers already in place at many stores. A MasterCard representative recently told the Wall Street Journal that they are developing the idea of a tag that could be attached to phones for mobile payments. The Senate considered this technology too underdeveloped to take immediate action on. The security of mobile wallets was called into question because this connected device is just another potential target for cybercriminals. As discussed in the hearing, layered security – featuring network segmentation, two-factor authentication, sophisticated network monitoring, and chip-and-pin technology – is no longer synonymous with consumer information protection and a secure transaction future. Increased sophistication of attackers today helps them evade all best practices and industry benchmarks. Retailers firmly believe that sharing intelligence across communities and the entire ecosystem will help them stay close to, if not get ahead of, these attacks and security breaches. That said, it will be interesting to see if retailers, banks, merchant processors, card issuers and the federal government are able to come together in the near term and work towards a common objective of adequately protecting consumer data and enforcing security.

(By Jake Ferry, Research Assistant)

Is Amazon All Set to Challenge Apple in the Mobile POS Market?

According to a recent Wall Street Journal story, Amazon.com Inc. (AMZN) is in the process of building a Kindle tablet-based point-of-sale (POS) checkout system. This is, in part, fueled by the company’s desire to be exposed to brick-and-mortar retail operations and gain an acute understanding of consumers’ in-store buying behavior. AMZN acquired mobile payments startup GoPago Inc. back in December with an aim to leverage their mobile payment technology for POS applications. Now, by seamlessly integrating GoPago’s credit card reader (like Square) with their Kindle Fire HDX tablets to create a complete transaction-enabling solution, the company aims to make it easy to use for small businesses. Amazon is toying with the idea of giving free Kindles and credit card readers to businesses in order to collect their sales data. If this were to happen, businesses that could not previously afford the switch to mobile POS solutions might find the offer enticing enough to take the plunge. Kindle’s price point will make it particularly attractive to small businesses. Stationary POS solution vendors in North America, including behemoths like NCR and Fujitsu, are at a distinct disadvantage with the lower revenue tier retailer community. Competitive pricing and the more desirable form factor of these mobile alternatives could take business away from these companies’ core stationary product offerings.

Amazon already has a wealth of knowledge pertaining to online shopping trends and instituting its presence in the physical world will help the company further its retailing ambitions. This is especially important given that a significant percentage of consumer spending today continues to happen offline. A potential upside for retail establishments is that Amazon is considering partnering with them to allow promotions and discounts to be offered through the Amazon.com website. Another benefit to an Amazon POS system is the company’s already established customer database. Amazon.com holds credit card information for more than 230 million users, which could potentially help make the checkout process fast, efficient, and convenient.  Customers would now have the option of completing their in-store transactions without taking out their wallets. By capturing information on their customers’ offline shopping habits, AMZN will hold an unparalleled advantage over its retail peers – invaluable competitive insight that will help enhance cross-selling and up-selling efforts on their website.

VDC believes this very advantage could also prove to be one of the primary barriers to adoption of the Kindle-based POS system. While this new solution can ease the checkout process and help retailers elevate overall service levels, they will, possibly, be wary of the fact that they are giving valuable customer-related information directly to their competition. With this initiative, AMZN will gather data from a variety of different retail stores and gain a much broader perspective of overall market trends and consumer buying behavior, and will be able to use that data to divert additional shopper traffic to its own website. The recent data breach at Target also begs the question - how secure will this new Amazon solution be. As we stated earlier, Amazon.com has detailed credentials for more than 230 million credit cards in its databases and this new system will, potentially, increase those numbers. This wealth of customer information will only serve to attract the attention of hackers and identity thieves.

Amazon is attempting to break into a field that is currently dominated by Apple. With its many apps and accessories that allow stores to turn iPads and iPhones into mobile POS devices, Apple products are the solution of choice for a large number of retailers, across tier levels. This most recent report only reaffirms AMZN’s sales and marketing strategy over the past several months, declaring itself to be a better, lower priced alternative to AAPL’s iPads – case in point, the Kindle Fire commercials. If AMZN takes a more proactive approach to positioning its tablets as a suitable alternative to existing stationary and mobile POS solutions in the market today, the company can achieve considerable success. For retailers, a competitive market simply means more in-store technology options to choose from. Whether AMZN’s potential entry into the POS market wreaks havoc in the retail industry remains to be seen, but this consumer device adoption trend most definitely is real. We will be sure to keep our readers updated on this developing story.

(With significant contributions from Jake Ferry, Research Assistant.)

Target's Data Breach – Is this good news for VeriFone and Ingenico?

The massive data breach at Target over the 2013 holiday season, which affected over 110 million customers, is slated to have significant repercussions on the payment community within the United States. The National Retail Federation’s (NRF) reaction to this infringement has been to lay the blame on retailers’ banking partners that continue to issue magnetic stripe payment cards. The bankers on the other hand, hold the retailers responsible, citing their inefficiency in securing and managing in-store systems. There is now considerable talk of a switch to the purportedly more secure EMV chip-and-pin based technology. MasterCard, American Express and Visa have all announced their intention to shift the liability for fraudulent charges onto retailers and banks, starting October 2015, if they do not upgrade their payment terminal hardware to those that accept smart cards. Unlike Europe (and elsewhere), businesses in the US continue to almost exclusively accept magnetic stripe cards. The primary deterrent to increased adoption of contactless payment in the region has been the potential overhaul of existing infrastructure, which would necessitate steep investments from card issuers and enterprise end users. This includes new terminal hardware, and distribution of chip-based credit/debit cards. In the past, payment terminal vendors have consistently indicated to VDC that these new technology upgrade investments are highly unlikely in the US unless card-related fraud increases. VDC believes this breach (and the ones that followed at Neiman Marcus and Michaels) could well be the tipping point for retailer adoption.

The focus of the conversation has now shifted to the world's two largest payment terminal vendors, VeriFone and Ingenico. According to VDC’s 2011 study on the market, these companies accounted for more than 75% of the overall market share in the Americas. Potential sales and upgrade opportunities arising out of this crisis have significantly driven up these vendors’ stock prices. VeriFone, in particular, has much to gain, with industry analysts such as Jefferies and JP Morgan upgrading their outlook on the beleaguered company. VeriFone was once viewed as a solid growth stock, well-positioned to capitalize on increased global credit card penetration. In an attempt to shift its business model from being hardware-centric to generating a recurring revenue stream via software and services, VeriFone lost its way via expensive acquisitions and, in the process, hampered relations with some of its leading clients. At the same time, VeriFone is also facing stiff competition from the likes of Square and PayPal, particularly among the micro-retailing community. This major data and security snafu that compromised consumers’ personal information might just breathe new life into the company. VeriFone has the distinct advantage of being a globally renowned payment company with a well-regarded legacy of providing secure solutions in compliance with the latest PCI mandates and government regulations. The company could potentially see a prolonged spike in hardware sales, especially as businesses in the US switch to accepting contactless smart cards.

Retailers and their payment partners can no longer push off this necessary infrastructure investment especially as they seek to assuage irate consumers’ privacy concerns. However, such a monumental change requires extensive collaboration between retailers, banks, card issuers, and payment processors. Increased public scrutiny, large-scale security breaches, and upcoming regulatory deadlines will certainly help get these ecosystem participants on the same page.

(VDC’s Steve Hoffenberg, Director of M2M Embedded Software & Tools, blogged about the data breach here.)

Preview of VDC's Barcode Label Generation Software Report

Barcode labeling is mission-critical to everyday operations for many enterprises. Organizations continue to invest in and adopt barcode technologies to accomplish a multitude of business objectives, including improving operations, ensuring compliance with industry standards, gaining visibility into processes, and associating more information with assets, products, and personnel. The demand for barcode label generation software has grown with the expanding adoption of barcode technology systems as a whole. When it comes to software, having fewer moving parts translates to better reliability. Flexibility, configurability and solution customizability are critical criteria influencing enterprise end users’ label software purchasing decision. Seamless integration with disparate data capture hardware solutions and enterprise software systems (including ERP and WMS) will be critical for application success. With traceability becoming a necessity and finding use in product recalls and market withdrawals, inventory accuracy, and safety and quality assurance checks, enterprises are increasingly turning to their solution partners for support. Each enterprise also has its own specific business processes and requirements that its barcode software investments must accommodate. The ability to configure off-the-shelf software in-house or via third-party partners, with minimum hassle, is an increasingly desirable characteristic.

Through innovative product features and complementary service offerings, vendors stand to distinguish their brand from competitors. From their solution partners, organizations seek configuration flexibility, vertical market/domain expertise, training and consulting services, and premier support. VDC believes that solution providers need to align their portfolio and service delivery models with what is now, new and next in the software industry – including cloud-based offerings, licensing options, mobile device applications, and hosting services.

In this research report, VDC discusses the fragmented vendor landscape for barcode label generation software solutions along with end user requirements and expectations of their solution partners. To learn more about the contents, click here.

Walmart’s Adoption of the PTI Compliance Mandate and What it means for the Produce Sector

In an effort to achieve greater transparency in the supply chain and to ensure customer confidence in their product, Walmart has mandated that their fresh produce suppliers must use case labels compliant with the Produce Traceability Initiative (PTI). Walmart began enforcing the mandate as of November 1, 2013 but will not begin rejecting produce until January 1, 2014 in an effort to work with suppliers. With Walmart leading the way, other retailers are sure to follow suit. 

PTI is a voluntary, industry-wide effort promoting the adoption of GS1 standards with a goal of “implementing case-level electronic traceability in the produce industry,” according to the PTI website. Widespread acceptance of this standard would vastly improve and maximize the effectiveness of current trace-back procedures, while also helping prevent and control the outbreak of foodborne illnesses. Suppliers will be able to take advantage of a vastly improved supply chain and data interchange, especially in the event of a recall, and retailers and consumers will benefit from greater visibility into the origin and remaining shelf-life of fresh produce.

Walmart’s mandate of PTI compliant labels will serve to educate the broader retail and produce distributor (including growers, packers and processors) communities, making them aware of the wide-ranging benefits of such a standard in enhancing product quality and expediting delivery. We fully expect comparable retailers to seek to limit Walmart’s resulting product differentiation by mandating this standard with their produce vendor partners.

Rigorous labeling standards, covering everything from format and orientation down to required displayed information, could be a significant obstacle for suppliers scrambling to adhere to this requirement. VDC believes that PTI compliance regulations create a tremendous opportunity for label generation software and hardware vendors not only through the sales of their products, but through training, support, and implementation services for growers and suppliers.

Food traceability initiatives (including PTI and the recently revised country-of-origin labeling requirements) are designed to keep consumers well-informed about the source of their food, helping them make intelligent purchasing decisions. We certainly do not want another horsemeat scandal on our hands now, do we?

(A special thank you to Scott O’Leary for his significant contributions to this blog post. Scott is currently a Research Assistant in VDC’s AutoID & Data Capture practice.)

VDC Research’s Takeaways from the 24th Annual IMI Thermal Printing Conference

I recently presented at the 24th Annual Thermal Printing Conference in Scottsdale, AZ (link). The only one of its kind, this conference is dedicated to thermal printing – with industry veterans coming together to discuss historical performance, current and emerging product development trends, market expansion strategies, and their collective vision for the future of this industry. Ongoing advancements in wireless communication, electronic documentation, and mobile device innovation (and adoption) will have a significant impact on the thermal printing market, with the potential to revolutionize the way vendors and their partners approach their sales and business development initiatives. Here are a few highlights from Day 1 of the conference (the only one of three that I could attend):

1. Harold Schofield’s State of the Industry Address – Harold has been a key influencer at this conference for more than 2 decades now and has consistently shared an update of the evolution of the thermal printing market at the start of every conference. This year, his presentation provided an overview of vendor performance in the thermal media and printer market, enterprise trends within each of the primary verticals (and print applications), and an update on technology developments. Vendors are keen to optimize thermal technology use – designing solutions to address newer, specialty applications including two-sided printing, color printing, and higher resolution printing.
2. Mobile Printing for the Connected World – I discussed VDC’s coverage of the portable thermal printer market (read more here). With a focus on key trends, applications and innovations driving adoption in diverse installation environments, I shared my thoughts on what’s new, now and next for the mobile form factor. The discussion was largely centered on the mobile point-of-sale application, wireless connectivity options, consumer device pairing alternatives, and empowerment of the global mobile workforce. Mobility is the future. What does this mean for enterprises lower down the proverbial pyramid? We firmly believe vendors who collaborate with these smaller firms to develop products that meet their unique requirements will achieve tremendous success.

This conference has proved to be a good platform for networking with industry leaders, while also helping gain an insight into the future of the thermal printing market – in terms of new technology/solution developments, new target markets and applications, and evolving enterprise investment considerations. Looking forward to attending the next one in 2014!

Preview of VDC's Mobile Printers Report

The global mobile (portable) printer market will see high single-digit compounded annual growth rates through 2017 from a base of $265 million in 2012. These devices will remain key growth markets for vendors and their channel partners, as end-users ride the mobility wave. Workforce mobilization and related requirements will spur current and anticipated product development enhancements, requiring support for various mobile operating systems, and seamless integration with various transaction-enabling solutions and contactless technologies like near field communication (NFC). Increased adoption of mobile printing solutions will not be concentrated in any one vertical market. In fact, the mobile transaction printer industry is faced with equal parts growth opportunities and challenges due to highly fragmented usage environments, customer types, and device configurations. The ongoing introduction of consumer-grade devices into the enterprise will present roadblocks while also driving hardware and application innovation. In order to align product and market development strategies with evolving user requirements and preferences, increased investments in R&D, distribution channels, and solution partnering are critical to capitalize on the significant opportunities that lie ahead.

Although the mobile printer market is not commoditized (yet), VDC expects the heavily fragmented competitive landscape to pose significant challenges to the vendor community in terms of attaining desired revenue growth and improvements in profit margins. An exclusive focus on hardware innovation alone will not be a sustainable business development strategy in the long run. Application development targeted at making it possible for the workforce to send print commands using any mobile device, on any printer, should be vendors’ goal with mobile printing. This will protect suppliers from shrinking hardware margins and losing valuable customers while generating a relatively lower cost and more profitable revenue stream.

To learn more about this forthcoming research report, click here.

The AIDC Top 20 by Modern Materials Handling in Collaboration with VDC

Modern Materials Handling teamed up with VDC Research for the 5th year in a row to publish their 12th-annual “Top 20 Automatic data collection suppliers” article, examining the state of the Auto-ID market and the leading manufacturers in the industry. MMH used VDC’s extensive research in the field to compile a list of the top 20 suppliers and to provide analysis of the industry at large.

The global AIDC market reached $11.264 billion in 2012, a 3.9% increase from 2011. VDC projects the industry to grow at compound annual growth rate of 7.5% through 2017, fueled by new customer interests, increased competition and opportunities in emerging markets.

The top 20 list featured a host of familiar faces, with Motorola solutions once again coming out on top, with 2012 AIDC and mobility revenues of $1.348 billion (est.), and Zebra Technologies taking second with $592 million in revenues. Honeywell, Datalogic, and Intermec round out the top five. In order to be included in the list, vendors must sell in North America and must focus on supply chain solutions. Though the list did not change much from last year’s (only Datalogic and Intermec swapped positions within the top five), consolidation among vendors could give next year’s list a shake-up. Notable changes include Honeywell’s acquisition of Intermec and Motorola’s acquisition of Psion.

Despite the snapshot of industry vendors being largely unchanged, VDC analysts point out a few key trends in the scanning, barcode printing and RFID markets that are changing the landscape. The migration of customers from laser scanners to camera-based imagers stands out as a major trend, with the market for camera-based 2D imaging solutions expanding by more than 30% from 2011 to 2012. The commoditization of barcode printing technologies also stands out as a significant market trend; driven by stagnant technologies, price pressures, and a fragmented competitive landscape. The market for mobile printing, though, jumped double-digits year over year, while the rest of the printing market remained relatively flat. In the RFID market, which grew nearly 13%, the big story is in apparel tagging, with retail customers using RFID for shipping and receiving operations in addition to the more traditional inventory control applications.

New opportunities in emerging markets and innovative applications stand to drive growth the AutoID and Data Capture industry in the near future. As competition continues grows and prices continue to drop, differentiation looks to be key for business continuity and profitability.

(A special thank you to Scott O’Leary for his significant contributions to this blog post. Scott is currently a Research Assistant in VDC’s AutoID & Data Capture practice.)

Living on the "Edge" - Breaking Down Zebra Technologies' Investment in ZBD Displays

The market for Electronic Shelf Labels (ESL) is entering the next phase of its evolution thanks to a recent plot twist. Zebra Technologies, the global leader in barcode printing solutions, recently was part of a $25 million round of investment in ESL provider ZBD Displays. A disruptive alternative to traditional paper-based shelf edge labels, this technology is gaining increased consideration among the global retailer community, and now it seems leading AutoID vendors as well.

Over the past several months, we have seen Zebra ramp up their investments in and development of RF-based solutions for asset tracking and inventory management and control – enhancing visibility into global enterprises’ diverse supply chains. The company aims to capitalize on emerging opportunities in new application areas backed by a sustained focus on RFID and RTLS product development. From our vantage point here at VDC, this move points to a couple of very interesting trends:

• Although ESL adoption is limited in North America, the technology continues to gain significant ground in Western Europe, Asia-Pacific, and parts of Latin America. Many large-format tier-1 retail chains in these regions appreciate the ability to automate price verification, enable dynamic price changes, and optimize workforce allocation while also ensuring pricing consistency.
• Flatlining barcode printer market growth and increased commoditization has hardware and consumables vendors including Zebra worried. It is only natural for them to look at growth opportunities outside of their traditional market strongholds – even in competing technology segments. This is where Zebra has a distinct advantage over its peers – more cash on hand to direct toward such strategic investments.

Falling display prices and recent innovations around label readability, connectivity, and communication make ESL solution providers a particularly attractive investment target. For a billion-dollar (well, almost) organization like Zebra that is faced with lackluster sales growth in its core competency, it is important to seek out and survey potential competitive threats to their legacy business. VDC believes shelf-edge labeling is one such focus area for Zebra. This investment in ZBD Displays will enable the company to not only reap the benefits of the inevitable migration to store operations automation but also potentially influence future product design, development and deployment. Zebra’s concerted efforts to grow its retail business – both in the US as well as internationally – will also hold it in good stead as the company attempts to maximize its returns.

Will Zebra’s strategic retail end-user alliances help ramp up solution adoption here in the US? Will Zebra combine ESLs with NFC, payment and RTLS to provide holistic retail solutions? Will the company take traditional ESL solutions outside the four walls of the retail shop floor to complement its RF-based real-time location systems (RTLS) business in manufacturing or warehouse environments? We’ll know soon enough.