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Radio-frequency-identification (RFID) tags are like talking bar codes: scanners within a few yards of the devices can read them. Attached to products, the tags could give retailers a 6 percent boost to their revenues by reducing the time their employees spend searching for merchandise. But privacy concerns and integration hurdles have to be overcome before RFID tags hit the mainstream.

Although Wal-Mart recently backed away from testing radio-frequency-identification tags in its stores, RFID tags aren't going away. Fueled by plummeting costs, their use is on the rise, especially in warehouses. RFID tags are catching on because they can store much more information about products than bar codes can, and unlike bar codes they don't have to be seen by a scanner to be recorded. In fact, RFID tags can signal their presence to scanners a few yards away even when obscured by packaging, so the contents of a closed container can be quickly scanned and recorded without the hassle—and expense—of opening the box.

While the devices are gaining a toehold in distribution, McKinsey research suggests that they will have their greatest impact in stores, where they will eventually cut labor costs and help prevent sales lost when items are out of stock or misplaced. The tags could help retailers save time looking for or tracking merchandise, and that should free up employees to spend more time working with customers. Eventually, checkout could be speeded up, too. As the exhibit shows, the tags could boost revenues for high-end and low-price apparel retailers by as much as 6.5 and 6.2 percent, respectively—with about half of that improvement coming from lower labor costs in stores.

The lion's share of these gains are years off, however. Privacy concerns raised by consumer groups may have something to do with the retailers' resistance to the technology. If it is eventually adopted, the tags may be affixed to individual items—they are mostly on containers now—and could be tracked by shelves equipped with scanners, which would record when items were removed, thus helping retailers keep closer tabs on inventory. What's more, the scanners could spot how many units of an item were being pulled off a shelf at any one time, an important defense against theft, since when more than three or four units leave a shelf simultaneously, they are often being stolen.

For more on the future of RFID tags, read "Smart tags for your supply chain."