Nike (NYSE:NKE) has been investing in technology to track its inventory. This includes putting RFID chips in its shoe packaging so it can know how its shoes are selling. In theory, this would allow the company to know which of its stores have the inventory to fulfill a digital order and which don't. Nike has also purchased Celect, a technology company founded by two MIT professors, to help it improve its ability to manage inventory and to sell more product direct to consumers.

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This video was recorded on Aug. 13, 2019.

Dylan Lewis: The other Nike story that we wanted to talk about hits on a similar theme, where we are looking at the direct-to-consumer and ease-of-use side of retail.

Dan Kline: I predicted this being 100% common 10 years ago, and it's barely being used.

Lewis: Is there a public record of that, Dan?

Kline: Well, my dad could probably talk to you about it. I wanted to do it at the family ladder company. Nike is using RFID to track inventory. What that means is, they can pull up and see exactly where each set of shoes has moved. That allows them to say, this store has inventory it's not going to sell, so we can ship it to another store, we can fulfill a digital order from that store; this store isn't going to get its next shipment before it sells out of that size. And they've bought a couple of technology companies to help them process that data. But they're getting into a situation where, using AI and other techniques and real-time data, they're going to be able to make better predictions about what inventory goes in what stores. They might figure out that for some odd reason, the Nike outlet in West Palm Beach, maybe they sell more size 12s, and maybe they go through running sneakers faster, because it's hot and shoes wear out in a different pattern. Whatever it is, they're going to know so much more.

I truly thought that this would be part of every noncheap retail product, because it makes so much sense. We track real-time data on the website. Why wouldn't retailers want to know?

Lewis: Yeah, it seems like a bit of a no-brainer. This focus comes by way of an acquisition. They bought Celect. It's a predictive analytics firm founded by two MIT professors, I believe. The focus here is making sure we can match inventory to the consumer needs and that the products are in the right place at the right time.

Kline: Yeah, and it's taking omnichannel to the next level. Amazon has talked a lot about how they can predict that somebody's going to order the RXBARs you talked about, a spare razor, and a deodorant, all in the same package on Tuesday. They don't know who it is, but they know that's going to happen, so they can package that up and not have to wait for the order to come in. This is going to give Nike the ability to match its inventory to where demand is, and as things change, maybe the guy who comes in and buys 12 pairs of sneakers for every new release to resell them on eBay, maybe he gets sick that week, and he doesn't come in. Well, they can then fulfill a digital order using those sneakers that didn't sell, because they will know statistically, if it doesn't sell by the third day, these collectible sneakers won't sell. And that happens. So at the outlet store, people hide sneakers. Usually, what happens is, they hide them because they're going to come back, but they never come back, because most of those exclusives, all the demand -- it's like a movie -- it's pent up for the beginning, and then it becomes much smaller, unless the occasional thing crosses to mainstream, but that's not that common.

Lewis: The way that I look at this focus on a retail perspective is almost like if you were looking at a beehive or an ant colony as a human. You have a sense of where all the ants are at any one point. You can see the flows of everything, hopefully in real time. I imagine that leads to much better decisions. My understanding is that this acquisition, Celect, was not a particularly large one.

Kline: No, it wasn't.

Lewis: I was looking at their Crunchbase fundraising history. They raised like $22 million over the last six years, so it couldn't have been expensive.

Kline: The founders are still active MIT professors. I think their goal was to prove concept and then sell. I don't know what percentage of it they owned, but I'm guessing this was a very nice payday. It's very expensive to live in Cambridge. You probably need a couple of extra million if you're an MIT professor.

We're going to see more of this. And we might see, if Nike makes this work, just like Starbucks has spun off a technology arm, and they're going to develop things that they may license to other retailers, this could be something that Nike licenses to its retail partners, or to other sneaker companies, or unrelated companies. No company is what it is anymore. If you're a certain level of company, you're a technology company. This is admitting Nike probably shouldn't build from scratch, they should find the expertise. They've bought other companies in this space before. This just builds on what they do and what they've been doing. And now we're seeing real-world application for it.

Lewis: Yeah. And for me, it also is a major point for them in owning more of the consumer relationship, and relying a little bit less on retail middlemen to handle their fulfillment. It seems like it's going to be focused on, Nike owns stores, and then, obviously, the subscription thing is going to be focused on a direct relationship with consumers. We've talked so much about the very difficult relationship that apparel makers or consumer product makers have with the likes of Amazon or Walmart because those are, by nature, difficult relationships. You're kind of competing, you're kind of friends. It's tough.

Kline: And Nike is even more complicated. I don't know how they term it internally, but there are tiers of what you can sell. Kohl's gets mostly lower-end Nikes or things that didn't sell or things that are off-model. Maybe Foot Locker gets certain exclusives, and Champs gets other exclusives. I'm sure if I was a sneakerhead, I would know exactly what the cadence and the rules for this are. But the sneaker selection in the mall between four different stores that sell Nike can be very, very different. There's a lot of stock models that are at every place. But it's not like a new iPhone comes out, and you can line up at any store that's an Apple partner, and they will have it. A new pair of Jordans comes out that's a very limited edition, maybe it's only at Foot Lockers of a certain mall level. It's very hard to track. And if Nike starts to take some of that back for themselves, well, Foot Locker might decide, "Maybe we're going to become more of an Adidas seller." These are very perilous relationships. I'll liken it to the cable company carriage deals. Yes, we carry HBO, but HBO is also a competitor. It's very tricky. So I think you might see some availability changing. We talked about Dick's before. Maybe Foot Locker says, "We have Foot Locker Kids. You're going after us with this. We're not going to feature you as much." This is a big shakeout, and I think there's a lot of shoes left to fall.

Lewis: We highlight these moves from Nike because, while a lot of apparel companies have struggled, tastes change pretty dramatically in a short period of time, Nike has endured and been a pretty solid performer in the retail space over the last couple of years. If they're investing in these spaces, obviously, you want to see other apparel companies, other retail businesses, making the same investments, because they've been doing it right.

Kline: So, you're saying I shouldn't be wearing Crocs when we hang out later? [laughs]

Lewis: You know what? Crocs have their place. It's in the kitchen, if you're working a job that you are on your feet for hours and hours and hours.

Kline: To answer you credibly, it's a lot like what we talked about with J.C. Penney. You have to solve the problem before it's a problem. Motley Fool as a company has a one-on-one relationship with a lot of people. I responded yesterday on Twitter to some listeners. Well, is that listener going to be more likely to listen? Of course, because it's a friend now. It's someone who knows me. I've communicated with them. If Nike messaged me and said, "Hey, it's Joe from Nike! We've got a new shoe for middle-aged guys that's more supportive. Boy, we think that's a better fit for you than the one your stuffing your foot into now," that'd be great. [laughs] And it works. If you told me, "Hey, listen to a podcast," that would mean more than somebody on social media who I don't know saying, "Listen to a podcast." This is building that interpersonal relationship, and it takes the store out of it at some point.