What is RFID Technology and How Does It Work? A Guide for Retail (2024) (2024)

Radio-frequency identification (RFID) technology is a way for retailers to identify items using radio waves. It transmits data from a RFID tag to a reader, giving you accurate, real-time tracking data of your inventory.

With supply chain visibility and inventory accuracy becoming more important, RFID has gone from “nice to have” to foundational for today’s omnichannel retailers.

RFID technology and its counterparts, like near-field communication (NFC) and Bluetooth low energy (BLE), are reshaping logistics, inventory management, and fulfillment.

With RFID, McKinsey estimates retailers can unlock up to 5% top-line growth from better inventory control, and achieve a 10% to 15% reduction in inventory-related labor hours.

Want in on the action? Learn how RFID technology works, its advantages for retailers, and how you can use RFID technology in your store.

What is RFID technology?

RFID is a wireless technology with two main parts: tags and readers. The reader is a device that has one or more antennas that send and receive electromagnetic signals back from RFID tags.

These tags, which store a serial number or unique identifier, use radio waves to send their data to nearby readers. They contain RFID chips, also known as integrated circuits (IC), which communicate data to the reader.

How RFID works

RFID belongs to a group of technologies called automatic identification and data collection (AIDC). You can use AIDC tools to identify items, collect data about them, and send that data to a computer system, with little human interaction.

For retailers that need to track stock accuracy, an RFID system that integrates with your inventory can increase efficiencies significantly. You can use it to improve inventory accuracy and visibility to create better shopping experiences for today’s omnichannel shoppers.

RFID systems have three components that make them work: an antenna, a transceiver, and a transponder (tag). The part of the tag that encodes the data is called the RFID inlay.

When you combine the antenna and the transceiver, you have an RFID reader, also known as an interrogator.

There are two types of RFID readers:

• Fixed readers, when the reader and antenna are installed in a specific place where RFID tag data passes. For example, you can check out at Amazon Go without going to a cashier. You just walk through an RF zone and the reader receives the tag data.
• Mobile readers, which are handheld devices that can be carried anywhere.

Once you have the equipment, the RFID tracking process can be broken down into four phases:

• Information is stored on a RFID tag and is attached to an item like your product
• An antenna recognizes the signal of a nearby RFID tag
• A reader is connected wirelessly to the antenna and receives the information stored on a tag
• The reader then sends the RFID data to a database, where it is stored and evaluated.

There are two common types of RFID tags:

• Active RFID tags: tags that have their own power source and can read in a range of 100+ meters. Active tags are used by companies where asset location or logistics improvements are important.
• Passive RFID tags: tags that don’t have a power source. Electromagnetic energy from the reader powers a passive RFID tag. This gives them a read distance from close contact to 25 meters.

There are also semi-passive tags, which rely on the same principles as passive tags, but include a battery that helps extend communication range.

However, passive tags are most often used in RFID applications. You can embed them into an adhesive label or into the object itself. Passive tags are low-cost, so they are better in situations where you won’t reuse them.

For example, if you receive a case of products, the supplier may attach passive tags to it. When you remove the products and throw out the case, the tags are also scrapped.

The advantages of passive tags include:

• Small size
• Light weight
• Affordability
• Long shelf life (20+ years)

Passive tags are used to scan at a distance from a few inches to a few feet. They operate at the following frequencies:

• Low frequency (LF RFID) 125 MHz to134 kHz
• High frequency (HF RFID)13.56 MHz
• Ultra-high frequency (UHF RFID) 856 MHz to 960 MHz

The higher the RFID frequency, the longer range you can scan.

Uses of RFID technology

RFID technologies are used in industries like healthcare, automotive, consumer packaged goods, aerospace, and transportation. In retail settings, RFID uses include the following:

• Enhance store operations. RFID can notify employees when a specific variation is out of stock or low inventory. It can also automatically show them where to find the product in the backroom and how many to pull.

• Analyze in-store traffic patterns. You can use RFID to track item movement throughout a store. With this information, you can learn your store’s high-traffic end caps, pinch points, and different employee and product paths throughout the day.

• Create virtual fitting rooms. By using a geo-locating RFID tag, the fitting room can track the item, show available colors and styles, recommend complementary clothes, and provide relevant product information.

• Offer contactless payments. Contactless payments are any transaction completed using a mobile phone, a contactless-enabled debit or credit card, or a key fob. Once a customer is done shopping, they can walk through an RFID checkout, verify their identity using biometric scanners, and pay for items.

• Assist stock-picking. Warehouse rents increased by 12% in 2022. Advancements in technology mean retailers can store goods vertically, rather than horizontally, and RFID technology can help with stock-picking. RFly, for example, created a drone that scans RFID tags and locates products inside a warehouse. If the item is stacked on a high shelf, the drone will collect it.

• Track temperature of goods. Certain products—including perishable goods—need to be stored at specific temperatures. Sensors within the RFID product tags can monitor temperature and keep a log of it inside the tag.

• Improve stock accuracy in store. The standard retail inventory process is still time consuming and manual. With RFID, you can instantly check in entire shipments, rather than rely on individual package scanning and blind receipts. It’s also used to find items, reduce cycle count time, and auto reorder products at safety stock levels.

📦 INVENTORY TIP: Set reorder points in Shopify Admin to get low-stock notifications and ensure you have enough lead time to replenish inventory of a product before quantities reach zero.

RFID vs. bar codes

Bar code technology is more common in retail settings than RFID. Bar codes are used as price tags and to track items in your store, storing information such as price, where it was made, and what batch it came from. Bar codes can be generated and shared through email or mobile phone for printing or scanning by the recipient.

Unlike bar codes, RFID tags don’t need to be in sight of a reader. Tags are embedded in an object and often complement EAN or UPC bar codes. They also hold more information than a bar code and have a larger read range.

Three advantages of using RFID compared to bar code scanning are:

• More efficiency: you can scan multiple items at once
• More durability: tags can handle exposure to weather conditions like sun and rain
• More security: you can encrypt RFID tags so only your reader can get the data

RFID vs. NFC

Near-field communication (NFC) is a subset of the RFID technology family. The big difference is that NFC is used for two-way communication. Instead of the scanner receiving or sending data, both ends can receive and send information.

NFC is also used for short-range communication, so both ends need to be within inches of each other. In retail, NFC is commonly used as a card emulation device, such as when a customer pays with a contactless payment method like Apple Pay.

Benefits of RFID technology

The usage of RFID technology in the Internet of Things (IoT) space is growing.

One report found that 52% of companies are increasing their investment in sensors and automatic identification. Another 27% plan to adopt the technology within the next two years. Let’s take a look at why.

Improved inventory management

RFID provides retail brands with improved inventory accuracy and stock reliability, which leads to higher sales and customer satisfaction. It also provides real-time and specific information on inventory levels and stock details such as quantity, models, color, and size.

Because RFID tags track all your items, you can eliminate stocking issues and improve security in your store.

Scanning products with a RFID reader also lowers the time spent on inventory, resulting in an increase in productivity and less manual work for employees. This allows staff to spend more time on customers and sales than on counting stock. With a handheld scanner, one person can scan multiple items in minutes, leading to more frequent (and faster) stock takes.

Other ways RFID supports inventory management include:

• Receiving inventory. RFID antennas and readers do not need line of sight to scan RFID tags. You can automatically receive shipments without doing any individual pallet or item-level scanning. Walmart recently announced the expansion of its RFID mandate program, requiring all suppliers and providers to make products traceable by RFID.
• Lowering cycle count time. Since RFID antennas work from a distance, you can do cycle counts faster and more accurately compared to traditional processes like physical inventory counts.
• Automating reordering at safety stock levels. Since your overall accuracy is improved, you can set rules for replenishment. This triggers re-orders without doing a manual spot check to find out if replenishments are necessary.

Improved loss prevention

Retail stores are under pressure in today’s economy. Compared to ecommerce, there’s more competitive pricing, rising overheads, and supply chain interruptions. Retailers also need to reduce the amount of shoplifting and employee fraud in their stores—a $94.5 billion problem in the US alone.

To overcome security challenges, retailers are turning to RFID technology to curb theft and reduce administrative error.

You can pair asset tracking data with sales and video data to see if more items left the store than were sold during a specific time period.

RFID lets you see which items were stolen, what time they were stolen, and video of the shoplifter. This helps you identify shoplifting trends and build a case against a perpetrator with authorities.

Faster checkout

More and more retailers are looking for ways to disrupt one of the least-loved components of the shopping experience—going through checkout.

Because the checkout experience is a major friction point for retailers and shoppers alike, some experts predict that stores of the future won’t have a checkout at all.

That’s why much of the retail industry was abuzz with the opening of the first Amazon Go store, which enables customers to grab items off the shelves and simply leave.

The store automatically charges the items to each shopper’s Amazon account, and sends them a digital receipt for their purchase. Forbescalled Amazon’s “Just Walk Out” technology the greatest retail innovation of the next 30 years.

This use case marks an important turning point for RFID technology. More retailers are looking for ways to improve the checkout experience and exercise more control over the shopping experience.

Increased efficiency for buy online, pickup in-store (BOPIS)

Buy online, pickup in-store is a customer service every retailer should offer. It’s a great way to increase in-store traffic and bridge the gap between online and in-store shopping experiences.

In a 2021 survey, 56% of shoppers had used click-and-collect services six or more times in the preceding 12 months, with over 8% of them using it more than 20 times.

Since RFID tracking gives you more inventory accuracy, you can consistently deliver BOPIS as a service. Without precise, real-time inventory counts, you could sell an item for pickup that isn’t actually available in-store.

Examples of RFID tags and technology in retail

Retailers are always looking for ways to test and implement technology to operate more efficiently, set themselves apart from the competition, and improve the shopping experience.

Most retailers see RFID technology as a clear path to more accurate inventory counts, but some innovative retailers use it for more than simple inventory management.

Not sure how radio-frequency identification technology could fit into your business strategy? Here are four innovative examples of how RFID technology can be put to work in retail.

1. Baroque Japan

Baroque Japan, a Japanese fashion retailer, recently introduced an RFID-based application from RFLocus that locates and provides visibility of inventory in 150 of its 700 stores.

The P3 Finder app enhances the existing RFID solution and enables Baroque Japan to serve the demand for buy online, pickup in-store (BOPIS) by keeping inventory counts at each store accurate and up-to-date.

The app is integrated with Sensormatic’s TrueVUE Cloud software, which enables Baroque Japan’s staff to find items required for restocking in stores more easily. The P3 Finder app uses 3D radar to show the item’s location in the warehouse and store, and enables staff to understand how close they are to any items at any given time.

2. Ralph Lauren’s virtual fitting rooms

Luxury retailer Ralph Lauren created its own in-store fitting rooms. Customers step into interactive fitting rooms to try on their merchandise for size.

A virtual screen uses RFID technology to read data from inside a clothing tag. It uses that data to present an overlay of the product on a live image of the customer.

These fitting room mirrors allow shoppers to get a 360-degree view of what they’re trying on, and with a simple gesture even to change the color or pattern of the clothing.

It also helps the retailer provide a level of personalization that can build loyalty and keep customers coming back for more.

3. Advanced Apparels’ RFID stock locator

Retailers are investing millions in integrated RFID solutions that minimize out-of-stock situations, provide real-time merchandise location data, and improve the customer experience. The technology allows them to track their inventory throughout the retail supply chain, from the warehouse shelves all the way to the sales floor.

Clothing wholesaler Advanced Apparel is one of the brands using RFID technology in this way. The merchant uses RFID to pinpoint where its goods are located within a warehouse—down to the rack or shelf it’s stored on.

When our [Wave] RFID handheld software sees a RFID Marker tag near a RFID-tagged item, it adds a trail—a history—of where a RFID tag has been. Thus, an item’s location might be “Warehouse1,” while the Marker’s location may be “Shelf 5, Row 15.”

This use case is a huge timesaver for brands with thousands of SKUs. In Advanced Apparel’s case, searching 6,000 SKUs for a single item is unproductive and not cost-effective.

The best part? Advanced Apparel added its own direct-to-consumer website earlier this year to co-exist with its wholesale deals and dropshipping partners. Now that the brand uses RFID to store and locate goods, it has an always-updated inventory count to sell omnichannel.

4.Unilever’s Ice Cream Shop

Unilever’s Ice Cream Shop mobile stores in West Hollywood have partnered with Robomart to offer on-demand ice cream deliveries, which will be tracked via radio frequency identification (RFID) technology.

Robomart’s temperature-controlled vehicles, which are each filled with RFID-tagged ice cream products, will be available for order through an app.

The system will enable real-time inventory tracking and purchasing data and provide product tracking and sales data analytics. Customers can order ice cream any time and pay for goods using the Robomart app.

Integrating RFID into your retail store

The retail industry is still in the early days of mass RFID adoption. Granted, the cost of implementing RFID technology is a worry for some retailers. Yet with the lower barrier of installation and the rising impact of shopper expectations, acceptance is inevitable in the coming years.

If you’re unsure, start small. Use RFID tags to locate inventory in your storeroom or warehouse. Analyze your peak shopping times for each store. And if you really want to push the boat out, create a virtual mirror that scans RFID tags and overlays what the product would look like on a customer.

Remember: Technology isn’t something to fear. When humans and RFID technology work together, merchants can save time, become more productive, and save money.