End of the bar code? The bar code which has served retailers so well over the past fifty years may soon be replaced by RFIDs (Radio Frequency Identification) or smart tags. These are tags with an embedded microchip that can receive information from a nearby computer. Unlike bar codes, smart tags could be used to track individual items. Right now a bar code can tell a retailer that the item he is looking at is a pair of White Nike Airwalks Size 11. It matters not which one of the 20 White Nike Airwalks Size 11 that he has in stock the retailer is holding. As long as the retailer can track how many of these specific shoes he is selling, the retailer can now how many to reorder. But with the new RFID technology, the retailer will not only know that he is holding a White Nike Airwalks Size 11, but that he is holding the 40005782th pair of White Nike Airwalks Size 11 ever produced.

The change is potentially as revolutionary as the introduction of the bar code was. Bar codes helped retailers move from tracking Nike shoes in their stores to being able to track those Nike by stye, size and color as well. But this still required all similar items (same style, size and color) to ge grouped together. Smart tags will let retailers get even more detailed and let them track specific items and therefore reduce theft and inventroy shrinkage even further.

The Economist reports on tecnological breakthroughs that are driving down the price of RFIDs and making them accessible:

Big technology firms such as Intel and Motorola thought it was impossible to build a tag costing a few cents. Traditional RFID makers, who grew up without the internet, did not understand the beauty of removing information from the tag and storing it centrally...Abandoning the likes of Intel, Mr Ashton and Mr Sarma turned instead to a handful of start-ups. One of them, called Matrics, says that it is now ready to start making the new tags. The price will depend on volume, says Matrics' boss, Piyush Sodha. If Matrics makes 1 billion tags a year, they will cost ten cents apiece, he says. At 10 billion tags a year, the price falls to five cents.

As efficient as some retail operations have become, there is still a lot of room to cut inventory costs:

Gillette is piloting two uses for its tags. The first combines smart tags with “smart shelves”, which are fitted with tag readers. Gillette says that retailers and consumer-goods firms in America lose around $30 billion a year in sales because shop shelves run out of products and stand empty. On Gillette's smart shelves, the tagged razors let the shelf know when they are coming and going, and the shelf keeps count. If it gets too empty, the shelf sends a message to store staff to fill it up.

$30 billion. Not a bad chunk of change to go after.

Tip of the day. Invest in a garment steamer! I am always surprised by how many retailers buy expensive apparel overseas and then neglect to make those $700 shirts look as nice as possible. Many retailers are understandably worried about ironing the clothes because they don't want them to look like used merchandise. But then they go and hang the wrinkled shirts and pants where they sit overlooked until being moved to the discount rack. The solution is a garment steamer that you can use to take wrinkles out while the clothes are hanging and doesn't leave any of the creases that ironing does. Have you ever seen a car salesman try to sell an unwashed car? Then why try to sell wrinkled shirts?

No surprise here: department stores and general apparel retailers had a sluggish January but specialty retailers showed strong growth in sales. The lesson is increasingly clear: only two kinds of retailers are able to thrive: the massive discounters like Wal-Mart and Target and the smaller retailers who successfully target a niche market.

A more level playing field: Some major online retailers have started voluntarily collecting sales tax on all Internet sales (and not just those within their own state), as part of a deal with 38 states that are looking to collect sales tax from web-based merchants. The deal would essentially give the dot-com retailers amnesty from any effort to pay back taxes. The Washington Post reports:

Under current federal law, Internet merchants must charge applicable sales taxes if the buyer is located in the same state as the company. But the new deal effectively applies the same sales tax laws to retailers' online and bricks-and-mortar operations. Online units are often chartered as separate entities and maintain physical locations in only a handful of places, thus exempting customers from most states from paying sales taxes.

For example, Wal-Mart has 1,500 stores scattered across all 50 states, but WalMart.com, a separate subsidiary, has a physical presence in only nine states.

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Yet another sign the dot-com bonanza is over and online retailers will have to make money the old-fashion way.

Tip of the day. When retailers have excess merchandise at the end of a season, their first instinct is usally to discount it to clear shelf space for the new items coming in. Often these discounts can be quite steep. But before discounting your excess merchandise, try offering your salespeople bigger commissions on the items that must go. You would be surprised how effective your salespeople can be if you offer them a much larger commission than usual. Items you might have discounted at 50% might fly off the shelf if you offer your saleswoman a 20% commission. This is an easy way to boost employee morale (it was money you were going to give away to the customer; why not give some to your salespeople intead?) A word of caution: as with all commission schemes, you have to be careful you are not creating perverse incentives such that your salespeople are only showing customers the out of season merchandise to the point that your customers feel they are being pestered.

An overview of the pros and cons of store credit cards from the customer's perspective can be found here. Store credit cards are rarely effective without offering some sort of incentive to lure shoppers. Says one customer quoted in the story:

I don't get a card unless it offers a special discount -- 10 percent off or something. I use them if there is an incentive.

And many customers are savvy enough to take advantage of the initial offers and then pay down their balances promptly and avoiding interest charges. So why are stores offering credit cards? Customer loyalty:

Talbots customers who sign up for a store credit card receive 10 percent off any purchase during their birthday month, first notice on sales and what Talbots calls "appreciation dividends," a $25 store credit for every $500 they spend in a given year.

The information exchanged at the point of sale is, in the long run, worth more than the money you are receiving because it will fuel future sales.

This Business 2.0 story has excellent background on category management, the process by which big retailers are increasingly surrendering stocking and merchandising decisions to their vendors. The article concludes:

Category management is retail's Faustian bargain: Lured by the savings and convenience of getting manufacturers to mind the store, retailers have ceded not only responsibility for their shelves but also any hope of differentiating themselves.

Any retailer who lets their vendors run the show is doomed to fail the blindfold test: You lead a blindfolded shopper to aisle five, remove the blindfold, and see if she can identify the store she's in.

This is good news for smaller retailers. The irony is that by letting their vendors dictate the merchandise they keep in stock, big retailers are actually starting to carry a narrower selection of items (as the Borders example in the story shows) that is increasingly similar to that carried by all other retailers. So, despite their size, small retailers can actually carry a wider selection of merchandise if they are smart about how they manage their inventory. And they better, because they sure won't be able to compete on price.