After a seven-year struggle, Avery Dennison Corp. – which pioneered self-adhesive labels 75 years ago – may finally be gaining traction on a new technology that could boost its lagging sales.

Radio Frequency Identification Devices – also known as RFID overlays – are being used to track luggage at McCarran International Airport in Las Vegas and Hong Kong International Airport following deals the company struck last year.

And just within the last few months, the technology has been purchased by German fashion retailer Gerry Weber Group, a major accomplishment after a series of false starts.

“We’re approaching the level of growth that people anticipated back in 2003,” said Jack Farrell, vice president and general manager of Avery’s RFID division. “Our sense is that 2010 will be the best in the industry by a significant amount.”

Worldwide sales of RFID-related technology are expected to hit $5.4 billion this year, up from about $4.7 billion in 2008, according to ABI Research, an Oyster Bay, N.Y. consultancy. And by 2014, worldwide revenues are expected to grow by at least another 12 percent.

If the projections hold up, the RFID business could breathe some life into Avery Dennison, an old-line company that has been lagging for years as its core business of pressure sensitive labels and office products experiences weak sales.

RFID tags are paper thin chips-on-a-label that allow products to be tracked without bar code scanning devices. Instead, the tags emit radio signals that are picked up remotely by proprietary electronic readers.

The tags are used to track products through the supply chain – from the factory to the store. And when affixed to pieces of luggage checked in at an airport, for example, they help baggage handlers track luggage and recover lost pieces.

RFID competitors include privately-held Alien Technology, a Bay Area company in Morgan Hill, and several Scandinavian companies, including UPM Raflatac, in Helsinki, Finland. Alien Technology does not disclose its financials.

The technology was seen as the next big thing in supply chain management when it was first introduced, especially when Wal-Mart ordered its suppliers to put RFID tags on all pallets and cases of goods being shipped to its warehouses and stores.

“We had investigated the business and there was a strong sense that RFID would be replacing bar codes in high volume,” Farrell recalled. “The Wal-Mart mandate gave everyone the confidence to leverage their investments and move faster.”

By 2007, however, only about 600 of Wal-Mart’s 20,000 suppliers had complied, causing some observers to declare the effort a failure due to the high cost of the tags and the lack of incentives Wal-Mart was offering suppliers to adopt them.

At the time, each RFID tag cost more than 10 cents, many times the cost of the standard tracking systems now in place, which rely on adhesive bar code labels and scanners. (Avery Dennison is a supplier of the adhesive for the labels.)

“Clearly, the industry didn’t grow as fast as we expected,” Farrell said.

Then, in 2008, American Apparel Inc., the Los Angeles based maker of casual clothing for youth, began using Avery’s RFID tags to track inventory in some of its stores.

Company officials did not respond to requests for comment. But according to a case study published by Avery, use of the technology dramatically increased the availability of all items stocked and reduced work-hours required for restocking.

Similarly, Hong Kong International Airport – which serves about 48 million passengers per year – recently reported a 5 percent increase in the number of bags it can process after placing RFID tags on each of the 40,000 pieces of luggage that pass through it daily.

Instead of having to be individually hand-scanned by airport employees before being directed to an airplane for loading, the bags now simply pass electronic readers installed at various points along their path.

Analysts skeptical

Analysts say that the RFID business could be an important adjunct to Avery Dennison’s core business, which hasn’t been experiencing much growth. Gross revenue fell to $5.95 billion last year, the lowest point since 2006.The company was hit hard by the recession when its business customers sharply cut spending.

In fact, Edward Jones, viewing the company’s traditional business as “very challenged,” dropped coverage of Avery Dennison about a year ago.

“They were facing an increasing amount of competition in their traditional businesses that was putting pressure on profitability,” said Daniel Ortwerth, a basic materials analyst at the St. Louis-based brokerage, who doubts that RFID technology will substantially boost Avery Dennison’s revenue.

However, Joseph Naya, an analyst at UBS Securities in New York, is more optimistic on the potential of the RFID business. But he questions whether it will ever break through.

“I don’t think it makes or breaks (Avery Dennison), but if it ever really succeeds, I think it’s a pretty significant opportunity,” Naya said. “The problem is that RFID has been on the verge for a very long time.”

The technology, however, may soon have broader appeal now that average prices have fallen below 10 cents per tag. Among RFID boosters is Marc Signorino, director of technology policy for the National Association of Manufacturers in Washington D.C.

“The big concern with the industry was getting the devices small enough and cheap enough to be ubiquitous,” he said. “While I don’t think it’s going to be the wildfire thing we thought it would be seven years ago, as the business case for efficiency and accuracy is being made in more and more situations, the utility of the chips will be recognized.”

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