Zebra's trackers raising the bar
Labeling leader changing its stripes with RFID printers
chicagotribune.com
By Mike Hughlett
Tribune staff reporter
Published February 24, 2005
RFID--shorthand for Radio Frequency Identification--lacks the zing of a hip tech acronym like MP3. But RFID promises to be every bit as revolutionary in remaking the world of supply chain management.
That lack of notoriety is just fine with Vernon Hills-based Zebra Technologies Corp., a household name in supply chain circles with its bar-code printers. Labels churned out by those printers allow companies to more efficiently move and track goods from factory floors to faraway loading docks.
In the long-term, printers using RFID technology may largely supplant bar-code printers--and Zebra is a leader in RFID printers, too. Meanwhile, in the short to medium term, there is still lots of room for growth in bar-code printing, particularly in hand-held printers.
Plus, publicly traded Zebra's cash-rich and debt-free balance sheet allows ample room for acquisitions, be they in bar-code printing or RFID.
While the bar-code business pays the bills, Zebra seems to get more attention lately for its RFID efforts. The reason: "If RFID lives up to the expectations of the bulls in technology, it could add a whole new dimension to [Zebra's] earnings," said Elliott Schlang, an analyst at LJR Great Lakes Review in Cleveland.
RFID has taken center stage the past year after Wal-Mart Stores Inc. told key suppliers to adopt the technology. The giant retailer demanded that by January its top 100 suppliers have RFID tags on goods shipped to three distribution centers in Texas, site of Wal-Mart's pilot RFID project.
Wal-Mart says more than 100 suppliers have shipped some RFID-tagged goods, though it wouldn't say if all of its top 100 have complied. The company's next 200 largest suppliers are supposed to be using RFID by January.
RFID is based on a computer chip wrapped in a small antenna. Zebra makes machines that print labels embossed with such chip-antenna assemblies. A key market for those printers: makers of products that end up at retailers across the world.
RFID labels are slapped onto pallets and cases on a factory floor. Each label is "encoded" with specific information about its box or pallet. Each label is then "read" by RFID-enabled scanners (which Zebra does not make) at various stages in the supply chain, including when they reach their destination.
Cost savings
The supply chain essentially works the same now--only with bar-coded labels. So why switch? RFID tags can be read much faster and more accurately. That means that companies like Wal-Mart expect big cost savings as RFID takes hold.
Zebra's managers look at Wal-Mart's RFID mandate and other corporate and government RFID initiatives and see history repeating itself.
Zebra, which employs about 800 at its Vernon Hills campus, took off in the 1980s as bar-code tracking became gospel in supply chain management. The company's name stems from the zebra-like stripes of a bar code.
The bar code's rise in warehouses and factories started when large companies like General Motors Corp. and Caterpillar Inc. sent out compliance edicts to their suppliers--just as Wal-Mart is doing today, said Mike Terzich, a Zebra senior vice president.
"That's the beautiful thing," he said. "This is the next wave of compliance."
Of course, this compliance cycle is only in its infancy and may take years before it is complete. Now, RFID is a drag on Zebra's earnings because the company is still investing heavily in developing the technology, said Charles Whitchurch, Zebra's chief financial officer.
Zebra launched seven new RFID printers last year, bringing its fleet of RFID models to nine. Sales soared in the second half of the year as companies scrambled to comply with Wal-Mart's edict.
Zebra will not disclose how much of its $663 million in sales last year stemmed from RFID printers, though analysts say it was minimal. For competitive reasons Zebra is keeping mum about its RFID forecast for 2005, too.
Kevin Starke, a stock analyst at Imperial Capital in New York, says he expects that by 2006 RFID printers will make up 5 percent to 10 percent of Zebra's revenues. But another analyst, Jeffrey Rosenberg at William Blair & Co. in Chicago, wouldn't even hazard a guess.
"The adoption curve of RFID is still very uncertain," Rosenberg said.
A key issue is cost. It's higher than anticipated, according to a report by AMR Research, a technology research firm in Boston. Thus, Wal-Mart's suppliers have done only the minimum needed for compliance, AMR says, spending much less on RFID than AMR predicted.
AMR estimates that a typical consumer product manufacturer (one that ships 50 million cases of product annually) must spend $13 million to $23 million to adopt RFID fully. RFID labels and readers alone would cost $5 million to $10 million.
The price of RFID labels has come down considerably in recent years. A label that cost 50 cents a year ago costs about 30 cents now. That price is headed toward 20 cents within a year and eventually 10 cents, according to Zebra. But that's still well above the sub-penny cost of a bar-code tag.
Other products growing
Fortunately for Zebra--given the vagueness of RFID's rollout--the rest of its business is growing at a strong clip. Its other products include hand-held printers that spit out receipts and printers that plaster images on plastic, like employee identification cards.
The company, which manufactures its printers in Vernon Hills and in Southern California, is coming off another strong year.
Net profits in 2004 were up 31.6 percent to a record $120.6 million. Sales rose 18.8 percent and growth was particularly strong in Europe and Latin America. International markets account now for 48 percent of Zebra's revenues.
Zebra's earnings are expected to grow at a healthy rate through 2005. But investors' worries that Zebra's profit growth may dip below the stellar pace of recent quarters has caused its stock to retreat.
Its price had risen steadily from the high $20s in early 2003 to a peak of around $60 in September 2004 before falling back into the $50 to $55 range. It closed Friday at $50.58. The market was closed Monday for the Presidents' Day holiday.
Stock analysts who follow Zebra remain mostly bullish. Five of eight surveyed by Bloomberg News currently have "buy" or "outperform" ratings on the stock, while the other three have it rated at "hold." |
