Item-level radio frequency identification could be the next frontier in supply-chain management. Several major retail chains — including Marks & Spencer and Tesco in the U.K., Metro Group in Germany and Movie Gallery and Best Buy in the U.S. — have been testing the benefits of RFID tags placed on individual items or have discussed doing so in the future.

But it looks like that next frontier is a long way off. Among retailers and their suppliers today, RFID activity largely is limited to pallets and cases. It’s by no means clear how soon — if ever — large numbers of retailers will start tagging everything from cereal boxes to flat screen TVs throughout their stores.

“Most people have put item-level trials on hold,” said Jeff Woods, research vice president of enterprise and supply-chain management at Gartner. “Most people don’t even know what they would do with an item-level tag if they were going to do it today.”

Proponents of item-level tags say they give retailers a better view of merchandise moving from the stockroom to the sales floor, through the point of sale and out the door. RFID readers built into a store’s shelves or employees roaming the aisles with portable readers can get a picture of in-store inventory more effectively than employees scanning bar codes one at a time.

Users can program shelf readers to capture data as often as they need it, said Jeff Richards, a director in San Francisco-based VeriSign’s intelligent supply chain services unit, which has integrated item-level RFID pilots for several retailers. “Where they may have in the past taken inventory on a monthly basis or every week or every couple of weeks, they’re now taking it daily,” he said. “For fast-moving items, you may want to take it every five minutes or every hour.”

With several employees carrying bar code scanners, it takes about eight hours to perform a physical inventory, said Richard Langford, senior vice president and chief information officer of Movie Gallery, which has been tagging videos, DVDs and games at two of its stores for the past six years. “With RFID tagging, we’re talking about a two-hour inventory with two people doing it.”

Automated inventory scans could help retailers keep shelves stocked with items customers want, monitor for shrinkage due to shoplifting or employee theft and cut the cost of taking inventory. A 2005 white paper co-published by VeriSign and RFID system vendor Intelligent Systems, based on the experiences of their mutual retail clients, reported that item-level RFID can reduce out-of-stocks by 60%, cut shrinkage by 20% to 50% and make employees eight times more productive.

Users envision specialized applications. For example, Movie Gallery has lined the return boxes at its two pilot stores with readers. As customers drop rented movies and games into the box, the readers log them in.

In addition, some retailers look to item-level RFID to help manage the process of returning CDs and DVDs to manufacturers, Woods said. Another application, he said, is to identify “component harvesting,” which occurs when a customer buys an electronic product, removes a high-value component and then returns the product to the store.

Also, item-level RFID “would lead to even better quality insurance, due to the traceability of groceries,” said Gerd Wolfram, executive project manager for the Metro Group’s Future Store in Rheinberg, Germany.

But even item-level advocates like Wolfram say the era of widespread deployment is not near at hand.

At the Future Store, a showcase for a platform of advanced technologies, Metro Group places item-level tags on cream cheese, shampoo and razor blades as well as on CDs and DVDs. It uses “smart shelves” equipped with embedded readers to monitor the stock.

Although it will continue its tests in the Future Store, Metro currently has no additional plans for tagging individual items, and “we do not expect RFID chips on articles on a broad level before the next 10 to 15 years,” Wolfram said. “Smart chips need to turn cheaper, and the technology still has to improve in terms of reliability and standardization.”

Before it started tagging items on a widespread basis, Metro would have to see the cost of chips fall from the current price of 0.20 euro to 0.30 euro (25¢ to 37¢) to less than 0.05 euro, Wolfram said in a statement on the company’s Web site.

Readers also cost too much, said Langford, explaining why the Dothan, Ala.-based Movie Gallery hasn’t extended its trial beyond two stores. “The readers we’ve been using are about $2600 apiece, and generally you buy two of those for any given store.”

Shelves with built-in RFID readers are “ridiculously expensive,” said analyst Woods. Although some companies are trying to bring the price down, “two years ago we were talking about $2000 a linear foot. In some cases, that would be more than the cost to build the entire store,” he said.

And using RFID to check out whole shopping carts full of merchandise at a time is “unrealistic because the read rates tend to be low,” Woods said. “As soon as the customer figures out that they can get a free steak by putting it in-between two 12-packs of Coke, I think there will be less enthusiasm from the retailers for automated checkout.”

Item-level tagging also faces another big challenge: concern about consumer privacy. Advocacy groups such as Consumers Against Supermarket Privacy Invasion and Numbering, the Electronic Privacy Information Center and the Privacy Rights Clearinghouse warn that once a consumer leaves a store with a tagged product, the electronic chip may become a beacon for market researchers, law enforcement officers and others who want information about the shopper.

In 2003, retailer Bennetton reportedly pulled back from plans to insert RFID tags in its clothing after the news drew protests, including a call from CASPIAN to boycott the chain. CASPIAN also has called for boycotts of Tesco because of its ongoing item-level tests and The Gillette Co. for putting tags in razor packaging.

Some retailers and technology vendors dismiss fears about privacy violations, pointing out that RFID’s electronic product code (EPC) contains no data about the person who buys the product. “It’s very natural for people to question new technology,” said Richards, adding that people raised the same concerns about bar codes in the early 1970s, as bar code labels also carry information about products. But while the universal product code in a bar code identifies the type and brand of product, the EPC includes a serial number that distinguishes, say, one pair of women’s white, size 7 Reeboks from every other pair in the world.

Privacy advocates say these factors leave item-level tags open to all sorts of abuse.

Picture a controversial political rally where many attendees are wearing tagged products, each with a unique EPC code, said PRC Director Beth Givens. “Law enforcement and security have readers that are picking up tags’ transmissions. When they [the attendees] disperse, they might go through one or more chokepoints where their identities are collected. There could be readers at those chokepoints, again picking up the readings from RFID tags. At that point, where identification is produced, those [tags] could be associated with one’s identification.”

One suggestion for protecting consumer privacy is to give shoppers a way to deactivate tags after they complete their purchases. The Metro Group’s Future Store, for example, offers a deactivating station near the exit. This device works well in Rheinberg, but to prepare for the day when it starts tagging many more items, the company must consider other solutions, he said.

While deactivation could offer a feasible solution, a separate deactivation kiosk isn’t the answer, according to Givens; rather, customers must be able to kill all their tags in one simple step at the point of sale.

But, Woods said, disabling or destroying tags “is a silly answer, given that many of the really good RFID business cases, especially at the item level, are post-purchase business cases.”

Nevertheless, consumers’ concerns about privacy are legitimate, and the RFID industry hasn’t taken them seriously enough, Woods said. “There isn’t a lot of work being done on consumer privacy around RFID, I think mostly because the industry doesn’t even want to have the discussion.”